Seeing further signs of bullish euphoria

Learnings and conclusions from this week’s charts: $.SPX(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $.IXIC(.IXIC)$ $Invesco QQQ(QQQ)$ $NASDAQ 100(NDX)$ $.DJI(.DJI)$ $GLOBAL X DOW 30® COVERED CALL ETF(DJIA)$

• Seeing further signs of bullish euphoria.

• Stocks are trading to the non-recession-rate-cut script.

• The current type of bull market is statistically close to maturity.

• Household debt-to-asset ratios have massively deleveraged.

• The realized equity risk premium looks stretched (late-cycle).

Overall, it’s more of the same frothy sentiment, euphoria, and bullish expectations on the stockmarket outlook. The trouble is the crowd is often wrong at extremes —but the crowd also represents a self-reinforcing consensus that flows until it goes. Caution is the easy keyword; caution both in terms of rethinking asset allocation and managing risk, but also caution in not getting too bearish too early without technical and/or macro confirmation. So again, keep watching the charts…

1. Peak Euphoria:  Starting off with everyone’s favorite weird indicator —but a key difference this time… after a string of back-to-back new all-time highs in this indicator, the flash December reading has come in ever so slightly lower than the November reading. One thing to note with indicators like this is that they send the most powerful signals when they reach an extreme and then turnaround — was November a climax in stockmarket euphoria?

2. Fun Flows:  Trumphoria saw record inflows into US equity ETFs during November. The crowd is voting with its feet in terms of the market outlook.

3. Expectations Gap:  As I’ve previously documented, consumer expectations for the stockmarket are running at record highs. However, interestingly this stands at odds with consumer expectations for their own incomes. Makes you wonder how this expectations gap is going to close (are stockmarket expectations too frothy, or is the real economy about to surge?).

4. Foreign Fervor:  Foreigners are rotating more and more into US equities. Another record high on this indicator in Q3. Compare and contrast the heights of the dot com bubble vs the depths of the financial crisis in terms of what this chart means.

5. Rate Cut Trading: This chart shows the average path of markets before and after the first Fed rate cut when a recession happened (red line) and when one did not happen directly after the Fed began rate cuts (green line). For now the current path of markets is consistent with the “no recession” line. In other words, the market is trading as if this is a non-recessionary rate cut. And if true, that’s bullish, it would mean more upside to come.