Bearish Case Gains Traction, But Here's What Would Really Be Cause for Concern
This is what investors should be watching for, even as price action remains positive, and the one thing that complicates it all.
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The S&P 500 hit a new all-time high on Friday and is indicated to be higher for the seventh straight day on Monday morning. There was some weak intraday action and a poor finish on Friday, but that is not having any immediate impact to start the week.
Concerns about the impact of a government shutdown have largely been ignored, but there is growing chatter about complacency and a possible bubble in the AI sector. Various sentiment measures are at levels that reflect high levels of exuberance.
The problem for investors is that many of the same concerns have been in place for months. There is no indication that they will suddenly start to matter at this point. The bearish arguments are the same as they were in July, August, and September. At some point, the market will correct and the bears will declare victory, but there is no way to predict when that may happen.
One factor that complicates trying to call a market top is that the third-quarter earnings season starts next week when BlackRock (BLK) , Citigroup (C) , Goldman Sachs (GS) , and JPMorgan Chase (JPM) report on Tuesday.
Market players are likely to engage in positioning action as earnings approach. There has been quite a bit of rotational action recently, with outperformance in many smaller stocks while the Magnificent Seven (MAGS) names have lagged.
This has been a great market for stock pickers recently, as aggressive traders are creating strong moves in a variety of sectors such as quantum computing and rare earth mining. The bears believe that aggressive trading is a contrary indicator that signals an overheated and irrational market, but, as we have seen, this sort of action can persist much longer than seems reasonable.
My best advice is to stay focused on the price action and ignore the arguments about why it can’t last. Watch for a shift in the character of the market. There was a warning sign on Friday when small-cap stocks started very strong and reversed sharply lower intraday, but there is no major technical damage so far.
Gap-up opens on Monday morning are tough to trust, so I won’t be chasing the open, but we’ll see how well things hold up as the day progresses. A weak finish will be cause for concern.
At the time of publication, Rev Shark had no positions in any securities mentioned.
