The Most Hated Rally in Recent Memory

The pace of the market's powerful move higher slowed on Thursday, but the Nasdaq's winning streak is now at 11 days, and early indications on Friday morning are positive again.

The rally off the March 30 lows to new all-time highs is one for the record books. What is particularly interesting about this move is that investor sentiment is still quite negative. Typically, this sort of rampage creates slobbering bulls that start talking about a new era of unlimited upside.

Not this time.

The Wall of Worry Is Still Standing

Skepticism has been persistent, and many investors are scratching their heads, wondering why higher oil prices, increased inflationary pressures, and economic concerns are being ignored.

The AAII sentiment survey has now shown more bears than bulls for nine consecutive weeks. Bulls sit at just 35.7%, well below the historical average of 37.5%, and bearish sentiment is running at 43%. That level of persistent negativity during a historic rally is unusual. It is also fuel for further upside. The investors who have been sitting on the sidelines, waiting for a collapse that hasn't come, will eventually have to put money to work, and that supply of reluctant buyers keeps this market sticky to the upside.

The Bank of America Global Fund Manager Survey tells a similar story from the institutional side. Conducted April 2 through April 9, it showed the broadest sentiment measure dropping to 3.7 from 5.6 in March, the sharpest single-month deterioration since March 2022. Growth expectations plunged to a net negative 36% from a positive 7% the prior month. Inflation expectations jumped to their highest since May 2021.

The Bull and Bear Indicator sits at 6.1, neutral territory and well below levels that would signal excessive optimism. Professional fund managers got more bearish in April even as the market was setting new highs. That is a textbook Wall of Worry and it is one of the most powerful forces a bull market can have behind it.

Iran Is Shifting

A shift in the Iran situation is helping sustain the positive market reaction. President Trump has slowed the military attack and is now betting that economic pain will drive Iran to make a deal.

Operation Epic Fury has been retitled Operation Economic Fury as a blockade of the Strait of Hormuz takes hold, shutting off Iran's oil shipments. It is estimated that in two to three weeks, Iran could experience what is called "tank tops," meaning it will run out of room to store the oil it is pumping and will have to stop production entirely.

The economic pressure is severe and is coupled with threats of renewed military action if there is no movement toward continuing negotiations and addressing the uranium issue. We should continue to see discussion of a new round of negotiations in the coming days. As long as that continues, investors are likely to remain optimistic.

Heart of Earnings Season Ahead

Next week, we move into the heart of earnings season, which means greater focus on individual stock picking and sector trends.

The AI sector has been powering this rally and the Roundhill Magnificent Seven ETF (MAGS) names have shrugged off the malaise they suffered since the last round of earnings. Will the group see a positive reaction to earnings this quarter? Last quarter the group was hit hard on concerns about too much capital spending and poor return on investment.

My Game Plan

My game plan is to respect this powerful momentum. The worst thing you can do is sit on the sidelines, hoping and praying for a top. It isn't easy to find good entry points after this sort of run, but there are some good charts, and if you manage positioning closely, it makes it easier to do some short-term chasing.

We have another upbeat open on Friday morning. If you are looking for a warning sign that the market is running out of steam, focus on an intraday reversal and a weak close. That will be the first indication that the market is ready to rest, but stay focused on finding good charts. That is where the profits reside.

At the time of publication, Rev Shark had no positions in any securities mentioned.