Investors Are Worried, But They Are Still Buying
The market climbs a wall of worry amid vast uncertainties, for one simple reason: No one wants to miss out on profits.
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Investors are grappling with a major market inconsistency. At the same time that the S&P 500 is hitting new all-time highs and the price action is becoming increasingly frothy, the level of bearishness is the highest it has been since November 2023. According to the American Association of Individual Investors survey, 47.3% of investors believe that the market will decline over the next six months.
Investors may be worried, but it isn’t hurting the market. On the contrary, the market’s refusal to decline on tariff and valuation worries is bringing in more money from the sidelines. The stronger the market stays, the more that investors with idle cash are inclined to put a little more capital to work.
As usual, the bears have a long list of compelling negative arguments, but the market is ignoring them. The tariffs were the main area of concern, but President Trump has been very strategic in his approach so far, which has frustrated the bears who predicted that he would just impose tariffs across the board without any consideration of their economic impact.
A rise in inflation is still the biggest danger the market faces, but tariffs are not the biggest danger. There is an uptick in consumer price index and wage inflation, but it is offset by optimism about economic growth. At this point, the market expects only a single quarter-point cut from the Fed in 2025.
Trump is moving so quickly on many fronts that the market is confused about the long-term impact. On the one hand, Trump is moving quickly for diplomatic solutions to both Ukraine and Gaza, while Elon Musk and DOGE are attacking billions in government spending. The Republicans are working on a huge tax bill, and illegal immigration is being shut down. All of these issues have economic repercussions, but it is impossible to quantify them at this point.
This is not an easy market to trade as many stocks become technically extended, but momentum is staying strong, creating fear of missing out. My game plan is to stay focused on price action and to stay with the momentum, but to use tight stops and take some partial profits if something becomes extremely extended.
The biggest danger that the market faces is that the high level of negativity will likely trigger aggressive selling as soon as the market embraces a negative event. There is no way to know what might cause a shift in the mood, but there is a long list of potential catalysts.
At the time of publication, DePorre had no position in any security mentioned.
