I spent a considerable amount of time over the last year or more talking about all the conditions across various asset classes and the high degree of correlation here versus the late 90’s. Stocks, breadth, value/growth, sentiment, positioning, false market signals, Emerging Markets, China, dollar, yen, oil, gold, etc. All set-up the same way they did in 1998, ahead of a significant run in stocks. That’s been my story all along, not once did that outlook change even into a year where even some of the few remaining optimists, changed their tune at the lows.
As we’ve hit new highs, I’ve discussed the defensive nature of most participants positioning. I’ve also discussed that as we’ve achieved this feat, the most important stat out there is that people don’t own stocks. Even the professionals. Exposure to equities reached a major low that we haven’t seen in many years. That coupled with the overall short interest keeps a bid under the market. According to all the chaos in the world, stocks don’t belong up here, but you have to realize that that opinion comes predominantly from those that don’t own any.
Lately it starting to feel as though the defensive nature of this market is starting to come off a bit. Starting to see quality and some momentum names pulling some weight as well. Breadth has hit all time highs with the indices too, which supports a healthy environment. According to my risk cycle that we discuss often, that means we’re in the early stages of something here, not at the end. It’s still quite interesting to me that the majority view these conditions as a risk, as opposed to an opportunity.
The lack of speed and correlation in the market day to day is a good sign. In fact, if you compare the market action coming out of 2011 post European financial crisis, or fall of 2010 months after the flash crash, once the market has committed to direction, the speed dies and the markets grind endlessly for weeks and months on end.
We just ended a 9 session win streak by the Dow today. Last time we had streaks similar to those were at the starting points of a significant trend.
Volatility is dirt cheap, and these conditions signal a trending market. These are the markets in which I perform best at. One should try to spend time viewing the market from a market of stocks perspective here, as opposed to a stock market. It would help immensely. Meaning, I won’t debate the gyrations of the market from here to there, but I’ll find you the best winners in this tape available.
In a couple months, we’ll revisit my “chart of the year” and the volatility compression that’s occurred in the monthly chart of the indices. Based on recent activity, one should be watching that closely for additional market velocity.