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The bulls are back. All it took was a two-day bounce off oversold conditions to switch the investment sentiment of the “experts.”
The financial television talking heads were universally bearish last Tuesday afternoon. “September is a weak month” they said. “We should expect a correction.”
By Thursday, though, after a 120-point two-day rally in the S&P, the experts were back on the bullish train. “We’re not going to get a correction this year,” they chimed. “We’re headed to 8000.”
It’s possible. The talking heads could be right.
In my experience, though, whenever the TV analysts hold a nearly universal opinion, it pays to go the other way.
On Tuesday, market conditions were oversold. The talking heads were unanimously bearish. And, the market was set up for a bounce – which we got.
Now though, the S&P is 120 points higher. It’s nearing its all-time high of 7816. Market conditions are now neutral. And, the talking heads are unanimously bullish.
Traders should steer clear. There’s more work to do on the downside.
Before we get a year-end rally, the stock market is going to experience a draw-down. It doesn’t have to be anything dramatic – maybe just a 5% decline or so. But, in the current environment, a 5% drop will feel a lot worse than 5%.
It’s not just the talking head sentiment-shift that has me thinking this way…
The Volatility Index (VIX) is set trading near the lowest level of the year. It’s near its lower Bollinger Band. And, VIX call options trade for more than 10x the equivalent puts. This setup often precedes a broad stock market decline.
Then yen is in rally mode. We’ve seen two spikes higher in the past few weeks. The yen now has a series of higher highs and higher lows. And typically, when the yen rallies, the US stock market falls.
The US government needs to orchestrate a bond market rally.
Admittedly, this last point feels a little conspiracy theory-ish. But, we know the administration wants lower long-term interest rates. They’ve publicly admitted they’ll do whatever is necessary to get that. Perhaps “what’s necessary” is to have stocks appear less attractive for a few weeks so that money flows into Treasury bonds??
After all, even a pullback to 7500 in the S&P still keeps the index up 10% for 2026. And, heading into the mid-term elections, a 10% gain in the stock market along with a 30-year yield below 5% seems more palatable than a 14% stock gain with interest rates at multiyear-highs.
In any case… all of this is to say traders should not be buying this bounce.
Indeed, aggressive traders should look for opportunities to add short exposure if the technical indicators stretch into overbought territory.
We’ll start buying again when the talking heads tell us it’s time to sell.
Best regards and good trading,
Jeff Clark
Editor, Market Minute