Date: January 13, 2020

An Opportunity for the Bears

Since mid-November, I have often discussed sentiment in the stock market. Plainly put, investors have been very confident to the point of being greedy and giddy to an historic extreme. We last saw that behavior in January 2018 which led to a 13% stock market decline to resolve the condition. Of course, there were other factors that led to that decline, like some cracks in the market’s foundation, something I am not seeing today.

When I have a little more time, I will post some charts to show the various indicators that scare me regarding sentiment. It’s really bullish out there. Besides comparing today to January 2018, we also sentiment like this in May 2011. Ultimately, we saw a 20% decline in Q3 that year, however, there were some pretty dark macro events like Greece, the U.S. debt downgrade and possibly U.S. default. Q1 2000, aka the Dotcom Bubble, was another time where sentiment was off the rails. However, the market’s foundation had completely crumbled by the time 2000 began. Today looks nothing like that.

Friday saw what is commonly known as a “key reversal” in the major stock market indices, many sectors and hundreds of stocks. You can see that on a chart as the market gapped open to a fresh all-time high and then closed near the lows for the day. One day set ups do not usually have all that power, but as I have already mentioned, we do have some extreme sentiment.

This makes the “trade” fairly easy to execute. For now, until and unless the various indices, sectors and stocks close above last Friday’s high, the short-term is neutral at best, negative at worst. Below, I grabbed one index and one sector for you to see.


Paul Schatz, President, Heritage Capital