September 15, 2014

The aging bull market continues

We are now five weeks into the rally from the August lows. Cyclical stocks, housing and industrials have begun to under-perform. This is the nature of these groups and is also evidence of an aging bull market.

As mentioned last week, divergences have developed, mainly characterized by lagging breadth and new highs on the Nasdaq and in small-cap land. Thus far, this has not produced a marked trend change in the market, as the favoring of large-caps has been overcome by rotational moves.

Meanwhile, most gauges of investor sentiment have moved into the excessive bullish arena and have reached levels last seen in late 2013, before the January 2014 correction.

Strategists are nearly unanimously bullish, as evidence by Barron's' recent cover and cover story. 

Bottom line: We are in a bull market in complacency.

    -Few are considering a correction in excess of a few percent.
    -Investor expectations are elevated.
    -Momentum is waning in the face of growing divergences.
    -New IPOs are growing larger (e.g., Alibaba) and more numerous, sopping up potential demand.
    -And the U.S. stock market is growing overbought.

While continued rotation and market selectivity might continue to buoy stocks, market risks are accumulating for the September-October period.

At the time of original post, Doug Kass was long QID and short QQQ.