Sellers are having a hard time lately. The markets were up almost 4 percent in October, and 2.5 percent in September. So far all the bears have managed to do is slow the advance. The markets were down by less than 1 percent this week and the bears are on the ropes.
The stage was set for a pullback. Traders had pushed the markets higher over the last two weeks (13 out of the last 15 days) in anticipation (buy the rumor) that the Fed would postpone any attempt to taper for at least the rest of the year. The minutes of the FOMC meeting on Tuesday seemed to bear out that bet. So it should have been a classic "sell on the news" moment but it didn't happen. All the bears could muster was a measly 15 points on the S&P 500 Index.
Since the Fed meeting the market has been more volatile, however. Traders are watching the small cap index, the Russell 2000, for clues to the markets' direction. It was the index that led the markets higher and all week it has been weakening (down about 2.8 percent).
Overall, the indexes have followed, trending modestly lower, first gaining a few points each morning only to give them back, usually toward the close. This usually indicates indecision, short-term confusion and could mean further downside ahead. Investor sentiment is once again approaching a level where we have seen pullbacks over the past year. It is also true that the markets are a bit overbought. That does not mean that the markets must automatically fall in order to work off that condition. They could simply back and fill, as they have done in the past (like they are doing now) for a few days or weeks in order to digest recent gains.
What the bears lack is a catalyst. In order to drive this market lower they need bad news and a lot of it. Instead, the Fed continues to ease, Washington has quieted down for now, earnings aren't bad and there is nothing on the foreign front to fret about. You would think that the lack of negatives would lead to complacency, something bears, as contrarians, like to see, but the opposite has occurred. Traders are worried that stocks are way too high and global markets are entering a bubble. Many are still convinced that at any moment we will swoon to the tune of a 10 percent correction or more. After all, they ask, when was the last time we have had a 10 percent correction? In my case, many clients still call every time the markets sell off even a little, convinced that this will be the Big One.
To me, these are all contrary indicators that tell me that until no one is worried about all of the above concerns, the markets will continue to do what is the most incontinent for the greatest number of investors, which is to keep climbing.
Sure, we could be in the beginning of another short-term 4-5 percent sell off right now. But that would be a good thing. We have had several 2-5 percent pullbacks this year and the markets have moved higher after every one. As I have written several times in the past, I believe we are in a typical stair-step rally higher. That is, the markets take two steps forward and then one step back.
I see nothing in the immediate future which would make me want to sell. In fact, I am expecting further gains and a strong end to the year. November and December are historically strong months for the stock markets. Every dip so far this year has been met with buying. There is, in my opinion, a mass exodus beginning to occur among bond holders. Right now it is still a trickle, but as time goes by, that flow will become a stream and then a torrent as fixed income investors, after 30 years of a bull market now ending, abandon bonds and embrace equity. You should too.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Schmick's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or e-mail him at Bill@afewdollarsmore.com.