Follow Jeff Cooper on Twitter: @JeffCooperLive
Has anything really changed that justifies the extreme levels of bullish sentiment — other than stocks going up?
Is the stock market discounting something favorable that bulls are chasing?
I don't think so.
Rather, my sense is that after the Brexit vote, players were poised to pounce and short the Brexit Bounce — especially within the context of a tedious 18 month trading range punctuated by several sharp downdrafts.
In other words, I think the way we got here was with an extraordinary level of players set to lay out shorts around a 50% retrace of the June trading range — to wit, SPX 2120 to 1992, which gives a mid-point of 2056.
A funny thing happened on the way to collecting on those bets.
The SPX rocketed through the 2056 like the proverbial knife through butter.
In fact as the below daily SPX from June shows, the SPX closed at 2070 on day 2 off the Brexit low — above the monthly equilibrium pivot.
The next session, the SPX cleared its 50 day line with authority.
The bottom line: the perception that the impact of an exit vote could mean the breakup of the EU was prevalent, which caused an extraordinary level of bearish sentiment.
In short, too many market participants were leaning to the short side of the ship; there was no shortage of players ready to short the Brexit Bounce which perpetuated a contrarian move. The Brexit Bounce morphed into the Brexit Bungee.
Extreme bearish sentiment on the surprise vote has quickly shifted to extreme bullish sentiment.
This is borne out by put/call ratios, the smart money/dumb money index and a decade high in the Greed/Fear Index.
While some may chalk up this speedy shift from a selling panic to a buying panic to our modern era of twitterpated, computer driven information and hence this can only provide us with insight as to the short term, as in a few weeks, I am mindful of the market maxim that volatility precedes price.
Be that as it may, assuming that the current upside spike in sentiment only speaks to a pullback over the next few weeks, I think the takeaway is that a picture perfect, pat pullback to the breakout pivot of 2110-2120 may be undercut leading to a push below the big psychological 2100 level.
A decline below 2100 would raise red flags as to a failed breakout.
If this plays out it would not surprise me to then see an contrarian bounce that tests current levels and perhaps nominally exceeds them.
But if this scenario plays out, the damage will have been done. The damage I am referring to is the inherent structure of a blow-off.
Blow-offs typically do not pullback for more than 3 days before resuming their runaway trajectory. So a meaningful pullback indicates the blow-off has culminated.
A 10 min SPX below shows a spike to 2170 on July 15 followed by a little decline to 2156. The index has been trading inside since.
This morning's the futures are indicating a push into yesterday's gap window which if exceeded will likely satisfy our idealized 2174 level today, on the idealized July 20 turning point day.
As a refresher, 2174 aligns/vibrates off this week on the Square of 9 Wheel and is opposite January 20, the primary low in 2016.
So today sets up as a key day.