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Is it possible to be too merry and bright heading into the holiday season? The question is timely, given the unmistakable upwelling of investor enthusiasm toward equities in recent weeks and a reignited impulse by traders to grab for the raciest assets. The trick, though, comes in trying to distinguish between a bull market feeding off rational fundamental positives and one that has grown so frisky as to be acutely risky. It’s not clear that line has been crossed, though it might not be too far away at this rate. What’s clear for sure is that we’ve entered the “belief” phase of this bull market, which is more than two years old yet is showing few of the telltale signs of ending very soon. The reason to favor stocks now is not because they are inexpensive, or underappreciated, or because there is a high wall of worry or deep reservoir of doubt about the economic underpinnings, but because we are somewhere in the middle stages of an economic expansion and technological investment boom that looks set to continue for a while. Flows into equity ETFs have surged lately, reaching a monthly record in November and amounting to more than a quarter of a trillion dollars over the past three months. While not at alarming extremes as a proportion of total U.S. equity market value, this action “reflects overt enthusiasm, particularly with the S & P 500 trading within the top decile of 12-month price momentum,” says Todd Sohn, ETF and technical strategist at Strategas Research. Wall Street turns bullish Brokerage-house strategists as a group were far too cautious entering 2023, the S & P 500 staying ahead of the consensus target virtually all year. They appear unwilling to be caught behind again, with near-universal calls for a winning 2025 with projections clustering around 6500 to 7000, or up 7% to 15% from here. For all the perceived symmetry between the market response to the elections of Donald Trump in 2016 and 2024, the Street’s outlook now is starkly different. In December 2016 after the initial post-election rally, strategists foresaw just 5% upside for 2017, the lowest projected return since 2005, citing “stretched valuations and the unknowns about Donald Trump’s first year as president,” according to a Wall Street Journal article at the time. As it happened, of course, 2017 was one of the highest-reward/lowest-risk years for a buy-and-hold investor, the S & P 500 scaling that wall of worry to a 20% gain without as much as a 5% pullback along the way. More anecdotally, longtime bearish economist David Rosenberg of Rosenberg Research last week published a sort of mea culpa and a turn toward giving an expensive market the benefit of the doubt. .SPX YTD mountain S & P 500, YTD Not to overlook the 2025 outlook from Blackrock Investment Institute, which begins by reiterating the strategists’ assertion that “We are not in a business cycle…Historical trends are being permanently broken in real time as mega forces, like the rise of artificial intelligence, transform economies.” On the surface, this sounds like the dreaded and damning “It’s different this time” hubris. Yet it’s a bit more nuanced than a statement that old rules are obsolete. Pretty clearly, the AI-investment binge helped carry the equity market through a stealth earnings lull over the past two years. Now earnings are broadening and potentially highly charged economic policy interventions await. Blackrock goes on to say, “Financial markets may work to rein in any policy extremes, such as with fiscal policy. Yet we think there will be fewer checks when stocks are running up, creating the potential for risk appetite to turn frothy.” Signs of froth And, sure, some froth is observably building, such as in the high-velocity trading indicators. The demand of downside index protection through puts is near historic lows versus the calls that grant upside exposure, known as the skew. The ratio of puts to call options traded has been running at levels generally seen as stretched to the downside (implying excess bullishness), though technician Stephen Suttmeier of Bank of America last week pointed out we remain shy of the deep extremes that were sustained during the 2021 tech-and-meme-stock mania. Bitcoin running to $100,000 has excited an entire cohort of ride-along crypto plays. Never overlook the fact that MicroStrategy is continually issuing billions worth of zero-interest convertible securities to buy more Bitcoin. Those converts are a way for the company to get paid for the volatility of its stock by hedge funds, who use arbitrage strategies to play the embedded options in the convertibles. And on top of all that, leveraged ETFs on MicroStrategy stock itself then have to hedge around the daily price moves. These are among the most heavily traded instruments in the market . Elsewhere, Goldman Sachs last week upgraded shares of Robinhood Markets at $39, which had surged from $10 ten months ago, days after Robinhood’s CEO said the company might expand into sports betting. And AppLovin shares are up more than 900% this year and now sit more than 150% above their 200-day average price, fuselage-melting readings of unabating buyers’ aggression. A broader subset of software and “fintech” stocks that had ridden the previous headlong emerging-tech rally almost four years ago — before crashing and undergoing years of neglect – are flying anew. DocuSign was up 27% Friday alone on a decent quarterly report, and has doubled from the early-August low. The WisdomTree Cloud Computing ETF and GlobalX FinTech ETF, full of names with elevated short interest, are up more than 40% in four months (while remaining far short of their 2021 peaks). This qualifies as a sort of “echo boom” from the last sustained retail-trader frenzy focused on unseasoned and fast-moving tickers. At a more speculative level, penny stocks attached to various “sky’s the limit” tech themes such as electric helicopters and quantum computing have routinely topped the most-active list. Just normal bull market? Still, for all the scolding and raising of yellow flags by investors made apprehensive by this rush for low-quality merchandise, it’s not clear that this is anything but a bull market doing bull-market things, with episodic overshoots and stampedes. One thing bull markets do, eventually, is to punish “prudence,” as defined by risk-averse participants. The wild speculative precincts of the market could even reflect a revving of animal spirits that could become a broader upward acceleration – which might then turn into a climactic short-term top. Importantly, too, all the good feeling and risk-seeking is occurring with the indexes in a solid uptrend, having generated excellent returns. In other words, this is largely an “expected” level of bullishness, relative to market conditions themselves. Most investor surveys, positioning gauges and even margin-debt levels remain shy of outright warning signals. I’ll point out again, as I did here two weeks ago , that most of this action is pretty well contained to certain corners of the market, where the high-turnover “story stocks” (electric helicopters? Quantum computing?), leveraged crypto vehicles and Trump-adjacent tickers (Palantir, Tesla) are ripping and swooning, to little noticeable impact on the core large-cap indexes. Last week is a good example of the clockwork rotational action in the bulk of the market. Just as cyclical stocks had become the clear choice into and after the election, the economic data have softened a bit from strong levels, prompting industrials and bank stocks last week to pull back 2% or so. A migration back to Big Tech allowed the indexes to grind up to new records while most stocks consolidated. The market itself is its own best advocate, in some ways. Leuthold Group maintains a Major Trend Indicator that combines four principal market drivers. The valuation, sentiment and cyclical metrics have largely been unfavorable for many months. Yet the technical gauge has consistently flashed bright green. In the latest reading from early last week, the dozen market-based trend indicators were all at a “perfect score” for the first time, covering the major indexes, market breadth, bellwether sectors as well as super-cap growth stocks. An interesting reading for those who believe one should spend more time listening to the market than shouting about how it might be wrong. None of this changes that 22.5-times forward earnings is a steep price of entry for the S & P 500 (even if valuation tends not to compress with earnings rising and the Fed getting easier). For now, investors can assume whatever they choose about the details and impact of policy under Trump 2.0, and on balance they seem to be more willing to price in incremental benefits than costs. Note, too, that the 6100-ish level (just above Friday’s close) has also ben a longstanding upside target based on some trend work that places it at the top end of the index’s long upward path. Bottom line: Don’t be surprised if some excuse for a stiff gut check comes around before terribly long. But don’t try to be a hero betting aggressively that the happy herd will suffer a comeuppance soon.
