Bullish Sentiment On The Rise

After a 3-day pause in the markets, stocks are back in rally mode this morning.  This isn't all that surprising given that this has been the pattern all year.  We used the weakness Thursday and Friday morning to do some buying for this reason.

In economic news, consumer confidence for May rose to 76.2, well above expectations and above the prior month's reading of 68.1.  Also, the Case-Shiller Home Price index rose 10.9% on top of the prior months 9.3% increase.

Asian markets were higher across the board overnight.  And European markets are also higher today.  An ECB board member said the possibility of further easing remains on the table despite the recent rate cut.

The dollar is higher today and commodities are mixed.  Oil is higher near $95.50 while gold prices are lower around $1377.

Bond yields are moving higher today with the 10-year yield spiking to 2.11%.  These levels mark the highest yields in over a year, since April 2012.

Trading comment: Bullish sentiment has been slow to rise, but is now getting to levels that raise a yellow flag for this market.  We could certainly still see investor sentiment grow more bullish in the near-term, but if that were to happen it would likely increase the odds of a more meaningful correction this summer.

Here are some of the indicators nearing extreme levels:  The Investor's Intelligence survey is showing the spread between bulls and bears at +36% (55% bulls, 19% bears).  That is a 2-year high for this indicator.  The AAII individual investor survey spread is at +27%, which is the second highest reading this year and also near an 18-month high.  And last week the Market Vane survey showed bulls hit 70%.  That is the highest reading this entire bull market!  You have to go all the way back to 2007 to find another reading in the 70s.  So investor sentiment is no longer skeptical, and is now getting more complacent.

In the short-term, the CBOE put/call ratio topped 1.0 in each of the last 3 trading days.  So it's not surprising to see the market rally off that short bout of pessimism.  I think bullish sentiment can continue to build for awhile, possibly thru June into quarter.  But I continue to think it raises the odds for a summer correction.  Stay tuned--