Listen, I’m generally a fairly optimistic guy. I tend to see the good in the stock market, while many others continuously focus on potential selloffs ahead. I remain mostly bullish for good reason as the S&P 500 has risen 75% of all years since 1950. It just doesn’t make sense to keep trying to bet against the stock market, especially when you consider the long-term 100-year monthly chart of the S&P 500:
It’s really hard to argue with this chart. Remaining long is nearly always the best answer. However, there are occasions when bearish signals begin to line up and it’s at those times that we need to take notice. The best recent example was as we headed into 2022. Currently, I’m not seeing as many bearish signs as I saw then, but I am absolutely watching the bearish signs develop. The analogy that I would use is that MAJOR storm clouds are brewing on the horizon. Will we be able to skirt the storm, or are we about to get a direct hit?
I’m beginning to think DIRECT HIT.
Let me just talk about sentiment for a moment. One key takeaway is that it’s a contrarian indicator. When others are bullish, we should turn bearish. When others are bearish, we should turn bullish. We can reach points of excessive bullishness and we might be getting there now in the options world. Simply put, the number of equity calls traded are swamping the number of equity puts. We haven’t reached the absolutely CRAZY period of extreme equity-only put-call readings ($CPCE) that we saw in the latter part of 2021, just before the 2022 cyclical bear market drop of 28% (on the S&P 500). However, those readings were insane and likely a once-in-a-lifetime, or at least a generation, bullish period. Current readings should not be ignored as history tells us that current levels of market optimism have foreshadowed selloffs in the past.
I generally focus on the 5-day SMA (short-term direction) and the 253-day SMA (long-term direction) of the $CPCE and routinely communicate both to our EarningsBeats.com members via our Weekly Market Report. For purposes of this article, however, let’s look at a 22-day SMA of the $CPCE:
I chose 22 days in this calculation as 22 trading days represents roughly one month. The 22-day SMA signal provided above has been rock solid too, which doesn’t hurt. Sentiment really does provide us clues about market direction and we’re at a level on this 22-day SMA that’s at least worth considering.
This is the tip of the iceberg in terms of bearish signals.
Bracing For A Drop
One of our favored features of our service is our Portfolios. Our flagship Model Portfolio is very aggressive and has outperformed the benchmark S&P 500 by a mile since its inception on November 19, 2018. Here are our Model Portfolio returns, by calendar year, since inception (S&P 500 return in parenthesis):
- 2018 (Nov 19-Dec 31): -1.32% (-6.83%)
- 2019: +51.92% (+28.88%)
- 2020: +100.96% (+16.26%)
- 2021: +2.06% (+26.89%)
- 2022: -32.72% (-19.44%)
- 2023: +20.36% (+24.23%)
- 2024: +48.30% (+23.31%)
- 2025 (through Jan 31): +10.32% (+2.70%)
To give you some idea of how bearish I’m growing, I wrote to our members on Friday afternoon to let them know we were exiting all stock positions in our portfolios, a full 3 weeks ahead of schedule. Since we began the portfolios in 2018, we’ve never exited 3 weeks prior to the end of our portfolio quarter. The risk of holding is growing very rapidly and, quite honestly, why take a chance right now when we already are beating the S&P 500 by nearly 8 percentage points in just the first month of the year?
Calling a market top or bottom is never a guarantee, so we don’t look at it like that. Instead, we do our best to manage risk and the risk of a drop outweighs the potential benefit of remaining long at this time, in our opinion.
FREE Event on Monday
I like to consider everyone who follows me here at StockCharts and on YouTube as part of our EarningsBeats.com community – a community that we’ve been serving for over 20 years now. We have a history of making very bold and very accurate stock market predictions as part of our platform, where we provide market education, market guidance, and market research. Given the current market environment, historical patterns, and the evolving technical and sentiment issues, now is one of those times to make another very bold call.
Please mark your calendar and plan to join me on Monday, February 3rd, at 5:30pm ET for a very timely event, “Bearish Signals Abound: How to Navigate the Uncertainty”. The information that I will share may end up saving you a fortune. To register for this event with your name and email address, and to save your seat, CLICK HERE.
We’ll send you room instructions on Monday!
Happy trading!
Tom