The
latest spike in the bullish percentage is another in a growing list of evidence
that the market is becoming increasingly vulnerable to a correction.
Also
keep in mind that according to Investors Intelligence, the percentage of
bullish newsletter writers has increased to a 3-year high while the percentage
of bears recently hit its lowest reading since prior to the 1987 market crash. As I wrote in Monday’s report, “A one-sided, bull-dominated stock market is a top-heavy one
and is quite vulnerable to unexpectedly bad news.” After the ebullience of the year-end,
end-of-quarter portfolio adjustment inspired rally has subsided, investors are
apt to consider the influence that rising rates might have on equities.
A corrective pullback in January need not put an end to the bull
market, however. A final “melt-up” in
the first quarter before volatility significantly increases is still my working
scenario entering the New Year.
The next stock market pullback might be a short-but-sharp affair
like the one in November 2010. A
pullback would clear the air and remove some of the speculative excess from
stocks in preparation for the final run-up.
[Excerpted from the 12/27/13 issue of Momentum Strategies Report]
