The bears got cocky yesterday.
And they paid for it today.
Let's wind the clock back.
On October 6, the CNN Fear & Greed Index hit 95, marking a multi-year high.
The F&G Index operates on a 1-100 scale, and a reading of 95 qualifies as extremely greedy.
The bears thought that would mark a top, and we saw plenty of headlines like this:
As you probably know, markets just kept on grinding higher.
But this morning, the CNN Fear & Greed Index was at 35, which marks high fear and low confidence.
Funny – none of the bears that were obsessing over the Fear & Greed Index at 95 mentioned it dropping to 35.
Plus, yesterday. CBOE's equity put-call was 0.74. That's substantially higher than the 0.655 long-term average, and indicates very high demand for put options. It's also the highest reading since September 22.
This means that traders were using put options to bet on a market decline.
And what did we get just as the bears came out of their caves?
A good old-fashioned buying party.
The S&P 500 opened green and blasted higher all day to trade up 0.8% to 2585.64.
And the small cap Russell 2000 landed a big fat uppercut on the bears by rallying 1.6%.
As we've been showing you, the Russell looked like it failed out of a bull flag pattern, but today's liftoff is fixing that situation in a jiffy:
If the Russell can get back in that upper range and break above 1515, the bears will take some serious heat.
Biotechnology also found footing again today.
The Nasdaq Biotech ETF (IBB) has been in pretty lousy shape since the October 6 high at $342.50, but it popped 1.5% today.
The iShares High-Yield Bond ETF (HYG) rose 1.0%, which was another big plus.
Traders are chattering about weakness in the high-yield markets, and drops in HYG get the bears pumped.
Why all the positivity?
First, we had some very nice earnings reports.
Cisco (CSCO) was a big winner, trading up over 5% on its better-than-expected earnings report. It finally took out its 2007 high, and it's at levels not seen since 2000.
Wal-Mart (WMT) rose over 10% on its own impressive report, which came just a day after Target (TGT) cratered on bad results.
Plus, the US House of Representatives passed their tax reform bill, which means we're one step closer to lower corporate personal income taxes.
The plan still has to pass the Senate, but nonetheless, it put traders in a good mood.
And the suddenly negative sentiment mean there was plenty of upside of fuel.
Crude oil dropped on fears oversupply of conditions, and energy and oil service stocks fell.
So where do we go from here?
It seems like the Russell 2000 may tell the tale from here.
If the Russell can keep squeezing higher, it will be a sign we're going back to a full “risk on” type of market.
On the flip side, if the bears can pull the small caps back down and make today look like a one day wonder, traders will start to worry.
Either way, today's action is just another example of just how stubborn the bulls are. Ever since the election, traders have ignored every excuse they've had to sell.
No one knows when that will change.