Larry’s Note: We’re about an hour away from market open… which means there’s very little time left before the December money frenzy kicks off.
I plan to recommend a trade as soon as the right setup appears. So if you’re not ready yet, don’t delay.
Last week, I explained how to profit from the frenzy… and how it can hand you your biggest short-term gain of the year. If you haven’t caught up yet, go here now to learn how you can take part.
“Animal spirits” are running wild among investors.
In other words, optimism about the outlook for stock prices is reaching record territory.
Contrarian signals are triggering as a result. This could be one of those times it pays to do the opposite of the crowd.
Because when investors get too bullish or bearish, we can often profit from a move in the other direction.
As Warren Buffett quipped, “Be fearful when others are greedy and… [be] greedy only when others are fearful.”
Today, let’s look at some recent evidence of the pendulum swinging too far in one direction… and what it means for the S&P 500…
Bullish Extremes
There are many ways to measure investor sentiment.
Some measures are survey-based. You simply ask investors if they’re bullish or bearish on the stock market outlook.
Others look at positioning data. That means things like money flows and stock market exposure among investor portfolios.
The nice thing about positioning metrics is that you can see exactly how investors are betting with their own money. Nothing matters more than when you put your own capital on the line.
And this is where things get concerning for the bulls.
That’s because it doesn’t look like there’s anyone left to support the rally.
For instance, one report noted that $140 billion flowed into U.S. stocks during November, as you can see below. That’s the largest monthly total on record.
Source: The Financial Times
But there’s only so much capital out there. Once most investors have already rushed in… who’s left to keep buying?
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Professionals Are Growing Complacent
Other measures show that even so-called professionals are piling into stocks. They’re susceptible to the same fear and greed emotions within all of us.
Yet that’s firing off a contrarian signal. This signal has delivered a pullback in the S&P 500 on multiple occasions this year…
Once a week, the National Association of Active Investment Managers (NAAIM) surveys professional money managers about their exposure to the stock market.
The results are converted into an index value that can be tracked over time. In the most recent update, that number was 99.24.
That’s in the top 95% of all readings and is the fourth-highest index value this year.
The pros are exceptionally bullish about the outlook for the stock market. They’re pushing their stock market exposure near the maximum.
But when the mood is running this bullish, that’s been a contrarian signal.
The arrows in the chart show when the NAAIM exposure figure has been higher than now. Just after those episodes, the S&P 500 went on to pull back by 5% and 8%, respectively.
At the same time, the Relative Strength Index (RSI) recently hit overbought territory at the 70 level. We saw similar RSI levels when the NAAIM index was running at those elevated levels.
Of course, a high level of invested exposure doesn’t mean the stock market has to crash.
But it shows bullish sentiment is running hot – maybe too hot.
And once the buying momentum slows, we could see a rush for the exits.
My advice? Play it cautious in the weeks ahead and as we head into 2025. You shouldn’t be surprised if the stock market rally runs out of steam.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict