Inflection Point Dead Ahead

In a post at the end of Feb I wrote about the “W” pattern that formed in the SP500. I didn’t mention it at the time but the right leg of the W bottom reflected a sentiment reading of 14, extreme fear. After that sharp 15% decline, as you would expect, no one wanted anything to do with stocks. But we know investor’s sentiment is a contrary indicator and when there is blood in the streets (extremely fearful sentiment), those usually mark the best times to invest. And this time was no different. We have rallied hard to close last week at 2044 just 16 clicks away from my “W” pattern target of 2060.

While we haven’t yet gotten there, the higher we go from here the greater the amount of overhead resistance we will need to chew through which should slow the ascent. As such, I expect sometime this week we start to see a period of consolidation. As with all consolidations it’s where we go after that matters. The market is (soon to be) at an inflection point. Out of consolidation we either punch through overhead resistance and resume the longer term bull market by making new highs or we will be able to look back and see this recent move higher was just a bear market rally and we head lower, a lot lower.  

As with all inflection points, good analysts will be able to make both a bull and bear case.  This time is no different. While I won’t go through the arguments to be made on both sides I do want to leave you with where we closed last week’s reading on the fear/greed index since it is an excellent gauge of market sentiment.

While not at a dangerously high level (85-90) there is no doubt this index is extended and reflecting the wild swing in market emotions. It’s time like these I think back on a very prescient saying from Uncle Warren (Buffet) who said “be greedy when others are fearful and fearful when others are greedy”.