The stock market has been rallying since 2009 and while it would be normal to think this bull market could end soon, traders should guard against that belief, counsels Greg Capra of Pristine Capital Holdings, Inc.
Long before bull markets end and the majorities are jumping in, the markets reach a point where the advance has been ongoing and starts to become unbelievable. By unbelievable I don't mean that the markets aren't moving higher, obviously they are. What is unbelievable is that the advance continues as long as it has. Bull markets do end at some point, but not until the majority of investors and traders do believe completely. Let's monitor this.
At the start of a bull move, few believe it is because of the many failed rallies within the prior downtrend and the typical sharp, fast drops. Another reason is that as prices are trending higher, most traders and investors using technical analysis are caught up in the indicator-based method. As prices trend higher, the indicators give overbought signals that create a belief that prices have moved too far and have to correct. Well, in a strong bull market, corrections are typically shallow or even sideways. I like to tell students new to Pristine that ask about overbought readings, what is overbought in a bull market is going to get more overbought; forget the indicators, they are meaningless. What we do use are market internal breadth and sentiment gauges.
In the above chart are the S&P 500 ETF (SPY) and the CBOE put/call ratio. Clearly, the trend is up and prices have moved further above the moving averages than they have in the recent past. For that reason, prices may move sideways or pullback a bit; however, just being further from the moving averages is only one piece of information and limiting its use on its own.
The other piece of information on this chart that we want to take note of is that option traders started to become more aggressive with their call buying (bullish bets) last week. While this increases the odds of the uptrend stalling, it won't be a signal of traders becoming too bullish until the five-period moving average (blue line) moves between the red lines. Option traders have a great record of getting fully committed to the market's trend at the worst possible time. For that reason, I keep an eye on their trading and suggest you do as well.
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Tickers Mentioned: SPY