The market correction we’ve been predicting to our clients for the last three weeks finally hit. The S&P 500 caught up with both breadth and high yield credit to within spitting distance of our downside target of 3,070 or so.
The key chart for this bull market has been breadth. And breadth has bounced off the uptrend that has marked the lows for most corrections this year.
It’s truly incredible the bears couldn’t generate more pronounced selling. This strongly suggests that stocks are nowhere near a significant market top.
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Indeed, the AAII survey continues to show that investor sentiment is nowhere near the bullish insanity one needs to see to claim there is a mania underway. The bulls sit at 33.6%, well below the historic AVERAGE of 38%.
Let me repeat that, the number of bulls is BELOW the historic average at a time when stocks have just hit new all-time highs (this latest reading was BEFORE stocks began to correct this week).
On top of this, investors are sitting on $3.4 trillion in cash… at a time when the Fed is literally broadcasting that it’s going to let inflation run hot.
What do you think is going to happen when inflation starts rising and eating away at all that cash sitting on the sidelines?
Investors will be forced to move into riskier assets to maintain their purchasing power. And if even $1 trillion of that $3.4 trillion in cash does this, we’re talking about the S&P 500 hitting 4,000 next year.
The bull channel from the 2009 low remains intact. When this correction completes in the coming days, the market will move to touch the upper trendline in mid-2020.
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Chief Market Strategist
Phoenix Capital research