A Bullish Combination

Legendary analyst Paul Montgomery once said: “The most bullish thing the stock market can do is go up.”

The S&P 500 printed a fresh all-time high today for the first time since July. Despite this bullish development, investors remain cautious. The combination of stocks breaking out and bearish sentiment could fuel the next leg of the secular bull market.

One of the first things you learn in trading and investing is “buy low and sell high.” It’s ingrained in us. So, it’s understandable that people don’t want to be buying at an all-time high. After all, every pullback, correction, or crash comes from an all-time high. However, all-time highs are more of a bullish signal than a reason to sell.

Michael Batnick shared this chart today in a fascinating blog post titled “The Most Bullish Signal in the World.” In the post, he explains that the average 1-year return for the S&P 500 following an all-time high is 11.5% (not including dividends). You can see from his chart that new all-time highs tend to be followed by more all-time highs.

Michael also touches on how bearish sentiment is right now. He says: According to Barron’s latest Big Money Poll, only 27% of money managers are bullish on the stock market over the next 12 months, which is the lowest reading in 20 years. Michael adds: “it’s funny how all-time highs, which are as bullish a signal as you can ever get, makes people more cautious.

In the tweet below, @sentimentrader provides some more context to that extremely bearish reading in the Barron’s Big Money Poll.

Sentiment is often a good contrarian signal, especially at extremes. The media has given investors dozens of reasons to be wary of this market. The good news is that all of this pessimism creates an opportunity for the rest of us. All of that cash sitting on the sidelines from cautious investors could serve as dry powder for the next bull run as they chase the rally in fear of missing out.

We'll continue to keep an eye on this and report back with any significant developments. As always, feel free to contact us with any questions.