Euphoria or Respite in Hated Bull Market? What Some Charts Show

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  • Fewer short sales are a sign that bears are capitulating
  • ETF inflows show style shifting rather than booming demand

Mullaney: U.S. Stock Market Pullback of 3%-5% Warranted

There’s little doubt that optimism over Donald Trump’s policy plans has spurred animal spirits largely absent in the stock rally that began in 2009. With the S&P 500 Index hovering around a record, what’s debatable is whether the sentiment has gone so far it spells trouble.

Here are some charts showing where sentiment stands as investors enter the earnings season:

1. Short Sales

Bears are giving up. The number of bets against the U.S. market as a percentage of total shares outstanding has dropped to the lowest since April 2015, falling in 2016 for the first time in seven years. Less than a year ago, it stood at the highest since the global financial crisis, exchange data compiled by Bloomberg show.

2. Bulls Reign

There are more bulls than at any time since mid-2014. The latest Investors Intelligence survey of newsletter writers showed the proportion of optimistic market participants exceeds 60 percent. Similar readings preceded two years of range-trading, during which the S&P 500 suffered two 10 percent selloffs.

3. Correlation, Volatility

With the earnings season about to kick off and a year that promises lots of political changes, investors are showing little concern. Expectations for equity correlation are at a two-year low, while the cost of hedging as measured by the CBOE Volatility Index is near its lowest level since July 2014. The VIX has closed below 15 every single day since Trump’s election.

4. Fund Outflows

While investors came back to the stock market in November and December, that wasn’t enough to reverse a second year of withdrawals led by mutual funds. In all, equity funds bled almost $77 billion in 2016, following $109 billion of outflows in 2015.

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