Markets were already in a strong uptrend. But the day after the election helped turn 2024 into one of the best years on record...
The S&P 500 is up 25% this year. That puts us on pace for one of the 10 best years since 1950.
The postelection rally has been impressive. But there's one catch... It's in danger of getting ahead of itself.
Futures traders recently reached the most bullish level they've been since early 2022. And if that bullish trend continues, it could signal tough times ahead for the broad market.
The good news is that we haven't hit euphoria yet. And that means stocks could still move higher in the months ahead.
Let me explain...
Sentiment always follows price. The longer a bull market goes on, the more excited investors get to own stocks.
It's not plain old excitement you have to worry about, though... It's euphoria. That's when high sentiment becomes a warning sign of potential pain on the horizon.
Unfortunately, we're getting near that stage. That's according to the Commitment of Traders ("COT") report on S&P 500 E-Mini futures...
The COT report shows what futures traders are doing with their money. And the E-Mini contracts on the S&P 500 are simply smaller contracts. They're where most of the action is in S&P 500 futures.
Futures traders have a bad habit of piling into the same bet at the worst times. That makes the COT report a useful contrarian indicator. And recently, it showed that these folks were the most bullish on stocks they'd been in years. Take a look...
The COT reading for stocks was at a low last year. It has exploded higher since then.
Again, that's no real surprise. Stocks have been on an incredible run over the past couple of years. The S&P 500 is up more than 40% since the reading bottomed last year.
Now, though, the market is getting frothy. The COT spiked after the election, with traders making the most bullish bets we'd seen since April 2022... when the last bear market was taking hold.
The good news is, we're still below those early 2022 highs. We're also still below the highs of early 2018, which became another painful year for investors. And after the election spike, the COT fell dramatically the week after. So this bullishness might not be moving to euphoria just yet.
Also, when it comes to sentiment extremes, lots of warning signs tend to flash together when a major decline is near. And most other sentiment indicators today are either in no-man's-land or just getting bullish.
We're not getting euphoric readings across the board. And that's a good thing.
This recent COT measure is one of the most bullish readings we're seeing today... So we need to keep a close eye on this signal. And we need to watch other sentiment indicators to see if they begin to match the COT for bullishness.
If investors move from bullish to euphoric, it'll be time to worry about the markets. Fortunately, we're not there yet. And that means we want to keep owning stocks now.
Good investing,
Brett Eversole
Further Reading
Stocks have rocketed to new all-time highs in the wake of the election. Some folks might worry whether this run-up is a disaster in the making. But it's better to be optimistic – while still managing risk... Read more here.
"Regardless of how you feel, the market is happy to be past the election," Brett writes. Small caps recently staged one of their largest two-day rallies ever. And according to history, we could see even larger gains over the next year... Learn more here.
