Breakout

Caution ahead: Market bounce is breeding overconfidence

Breakout

If timing the stock market was easy everyone would do it. It was only a week ago that Aaron Task and I were discussing the record outflows from stock funds and into bonds as investors tried to protect themselves from a continuation of the nearly 6% slide in the S&P500 (^GSPC) from the start of 2014 through February 3rd.

Naturally the stock market has done nothing but move higher since then, taking on 4.4% since the open of trading last Tuesday. So how did all those cool-headed investors react to their chance to get out of stocks at higher prices? Judging by the AAII Invesor Sentiment Survey they’re lunging back into stocks. Over the last week the number of self-described bulls jumped to over 40% while bears plunged from over 36% to a mere 27.3%.

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Yahoo’s own poll results showed a similar rise in bullish sentiment over the last week:

“It’s funny how one week and suddenly all the fear and angst kind of disappeared,” says Eric Jackson of Ironfire Capital in the attached video. “We’re back to the fat and happy attitude that existed at the beginning of this year. I’m definitely worried that the complacency is back.”

Of particular concern to Jackson is that momuntum stocks like Tesla (TSLA) and Facebook (FB) have been impervious to the selling. In fact both are making new highs on Thursday afternoon.

“If we’re going to have another 5% move or more I’d watch for some of those names to get hit,” he notes. As a trading rule of thumb, until the momentum plays are taken down hard the market is going to continue to have a sentiment problem.

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