For all the handwringing about why you should “sell in May and go away,” both U.S. global stock markets have had a very strong last six weeks.
This has sent the “permabears” crawling back into their caves in Montana, even as their clients continue to suffer for their “permabull” calls on gold.
But even the few bulls the financial news channels could round up over the past few days struggled to explain the S&P 500’s relentless march to 2,000. Hedge fund maven David Tepper also recently backtracked on his cautious view of U.S. markets.
So why the sudden change in mood?
One tip of the hat goes to European Central Bank (ECB) President Mario Draghi, who just introduced a very proactive set of stimulus policies at this month’s ECB meeting.
Throwing everything he could at Europe’s deflation problem, Draghi lowered the policy rate, lowered the deposit rate and launched long-term refinancing operations — a trifecta of simultaneous stimulus measures that took the market by surprise.
Recall that Draghi has had success in kick-starting financial markets before. One instance occurred in July 2012 when he promised to do “whatever it takes” to save the euro.
Meanwhile, U.S. news has been solid. Economic growth has picked up strongly after a Q1 hiccup. A strong labor market report, combined with good May vehicle sales, suggests that the U.S. economy should expand near 4% in Q2. That should help boost earnings and support a continuing stock-market rally.
Indeed, U.S. stocks remain extremely strong, even as the S&P 500 hit four consecutive new highs. Even the Russell 2000, which tumbled more than 10% in late March and early April, has recovered most of its losses.
Positive Sentiment and Weak Technicals
Frankly, all of this terrific news has me a bit worried over the short term.
I study many market sentiment indicators to gauge the temperature of the market. And frankly, all are screaming “extreme greed” at levels I have not seen since the middle of 2013.
There are other worrisome signs as well.
Two days ago, I saw the word “goldilocks economy” in a headline in theFinancial Timesfor the first time since 2007.
The cover story of a permabear financial publication here in the United Kingdom screams: “The best of the bull market is yet to come. Boom Times are here again.”
Since I’m a big believer in betting against headlines, this only adds to my worry.
Nicholas Vardy is currently editor of the monthly investment newsletter, The Alpha Investor Letter, which provides longer-term global investments. He also writes two weekly trading services, Triple Digit Trader and Bull Market Alert, which focus on making short-term profits in the hottest markets in the world.