I posted a tweet yesterday making an observation about the recent market action in response to a couple of interesting stats shared by Jon Boorman:
This is something that’s been on my mind for a couple of weeks now; it would seem like there are numerous reasons to be skeptical of stocks here, after all we’ve learned that stock market luminaries such as Carl Icahn, George Soros, and Stan Druckenmiller have recently become quite pessimistic on equities. Yet stocks have remained resilient and continue to trade in a relatively narrow range despite some of the worst fund flow data we’ve ever seen and sentiment data that would otherwise indicate we are in a bear market. Even just last week equities flirted with breaking below key levels of support only to finish the week strong and close back above support.
S&P 500 (Daily)
It’s not hard to see that a potential rounding top pattern (some have called it a head & shoulders top) has formed during the last couple of months. However, this consolidation could also become a continuation pattern in the event of an upside breakout. Too often market commentators interpret consolidation patterns after an extended uptrend as being bearish. They can also often (more often than not) be bullish and in the case of the current consolidation I would say it’s not much more than a coin flip as to which way the market resolves.
Despite a potentially tumultuous macro backdrop we have been in an unusually placid period for U.S. equities for the last two years:
The last time that the S&P traded in such a narrow range for two years was 1995 and was followed by an enormous multi-year rally.
One of our favorite long-time follows on Twitter, @ukarlewitz, just penned a masterful weekly update which summarizes and elaborates on many of what I have been pondering for the past couple of weeks. He reaches a decidedly bullish conclusion and I especially like the following sentence which nicely summarizes the current equity market dynamic:
“What is remarkable now is that price is virtually unchanged since the end of 2014, yet bullish investor sentiment has been largely unwound.”
Against a backdrop of any number of potential threats to the market, equities may be perfectly positioned to stage one of the least anticipated and most unloved rallies in history.
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