As the markets grind higher into the year-end the look of what is happening is becoming clear. The Fed is inflating a bubble. Valuation on the S&P is approaching 19x which is up from ~14-15x a year ago. Valuation isn’t a great tool for timing however when multiple expansion is accepted by the market it should be respected. Sentiment a year ago was 4% on the Daily Sentiment Charts and 3% on the CNN Fear and Greed Index and today both are extreme. They have been elevated to an extreme for the last few months and as I’ve said: “sentiment is a condition and one must have a trigger to turn after an extreme reading.” A year ago in December, I counted 240 downside DeMark buy Countdown 13’s within the S&P and there are only upside sell Countdowns triggering daily. I couldn’t be more cautious at this point just as I couldn’t have been more bullish exactly a year ago.
I’ve recently written about how sellers are unmotivated (as they always sell lower), and how the US-China trade watered-down deal is a sell the news event, and then how this market reminds me of a musical chairs market. I recently spoke at a wealth management conference and the overwhelming thing I heard was how they wanted to get into 2020 to sell. We might start to sell a little selling starting with $41bn of 5-yr notes being issued on 12/24 and $32bn 7yr notes on 12/26. This will take away some of the Fed’s liquidity that has caused this bubble. At the end of the month, there will also be pension rebalancing with a rotation out of stocks into bonds. Considering the lack of liquidity it could spook some people headed into the new year.
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