The stage is set for a volatile end of the year in the US stock market after signs of a boom and a downturn, both of which reached peak levels in recent times.
The bull is being encouraged by the strength of the current rally. A gauge of momentum – a five-day moving average 52-week high on the New York Stock Exchange relative to lows – is off its highest in just 10 years. The bears are pointing to measures of extreme positive sentiment – such as record call option volume – to ease their case for a pullback.
“There’s really no way to completely circumvent the conflict that’s happening right now between high optimism versus high speed,” Sonicial Capital Research Inc. founder Jason Goeffert wrote in a note to clients. “In such environments buying breakouts with leveraged conditions is highly risky. Shortening is not much better, as such a motion can continue for weeks or months. “
The S&P 500 Index lost a four-day streak as Congress on Tuesday Moved towards a spending package that would boost the economy. The US benchmark is trading a fraction below its all-time high and has risen 65% from its March low.
According to the latest Bank of America fund manager, investors are the most bullish on stocks and commodities since February 2011 Survey. BofA strategists said the decline in cash risk has led to a sell-off for equities.
“Virtually, the most likely scenario is limited, at best, with a high probability of pulling 3% to 8% minimum over the next 1 to 2 months,” Goeffert wrote. “This leaves both sides with a poor setup.”