Readers of this blog may have noticed that over the last several weeks I have become less bearish on the broad stock market. While there are still plenty of good reasons for this market to roll over soon and take a serious correction, there are also several factors now that are suggesting any corrections will be modest and that this long-term equity rally still has legs. There seems to be some divided opinion now among the analysts that I follow on whether the broad stock market will take a severe correction over the next few months or later in the year or possibly even in 2017. One recent bullish factor is the strong long position of Commercial traders in the current S&P 500 COT (Commitment of Traders) charts. These traders are rarely wrong. Another bullish sign can be found in the stock charts of several big banks - Bank of America, Citigroup, JP Morgan and Goldman Sachs. All four charts are close to completing inverted "head and shoulder" bottoms that have been forming since early January. (In technical analysis the "head and shoulder" chart pattern is bearish if it is upright but bullish if it is inverted or upside down.) In contrast to this, market sentiment among the general population (i.e. us "regular folk") is starting to turn bearish. Of course, we have been bearish for quite a while and do not follow mainstream sentiment. Indeed, the fact that the general public is turning more bearish now is an argument for the bullish view.
It seems that the "high rollers" are betting on a bullish stock market, at least for now, and it would be foolish to simply ignore this even though the long-term chart for the broad stock market could now be described as "a bubble looking for a pin". We also need to keep in mind that the Federal Reserve has a printing press and is highly motivated to keep the stock market propped up. It will be interesting to see if Fed Chairwoman Janet Yellen lives up to her dovish reputation and starts to announce more accommodative economic policies from the Fed as the year progresses. Investors and traders will certainly have their heads up tomorrow when the FOMC meeting concludes and is followed by a press conference with the Fed chairwoman. If Ms.Yellen pulls a "hawkish surprise" (see last Sunday's blog), equities could start to fall, but as mentioned above, any correction now may be modest and short-lived.