Articles

By: Costas Bocelli — August 1, 2019

Big Wall Street Bank Turns Uber Bullish at “The TOP” – Is it a Signal to Get Out of Stocks?

The stock market is not having a good year…

…it’s having a great year!

The S&P 500 has already gained 20% year-to-date and recently traded above 3,000 for the first time ever.

(Click any image to enlarge)

spx tmi

Professional money managers would be thrilled to close out their book, call it a year and deliver those above average annual returns to their clients.

But the problem with that approach…

…there’s still five months to go until the end of the year!

You see, there’s nothing to say that stocks can’t keep going even higher.

In fact, after posting one of the strongest gains for the month of June, the S&P 500 followed that up with a big time breakout in the month of July.

So those same Professional money managers have a real dilemma.

They can close up shop and be content with a +20% gain, or risk falling behind the benchmarks should stocks continue to advance further into record territory.

It’s the “Fear of Missing Out” that prevents them from checking out early.

Do you think there’s more left in the tank to this rally?

One of Wall Street’s biggest investment banks thinks so.

Goldman Sachs says the S&P 500 bull-run has plenty more to go as it raised its year-end 2019 target for the U.S. benchmark index to 3,100.

That implies more than 3% of additional upside.

And it can easily overshoot as it thinks that the S&P 500 will hit 3,400 by the end of 2020.

That’s roughly an additional 10% of upside potential in their forecast.

Now here’s the thing…

Should investors view Goldman’s bullish call as a “green light” to load up on stocks?

Or perhaps…

…take a more skeptical view and a contrarian signal to get the heck out and fast.

You see, Goldman’s bread and butter business is market making which means taking the other side of their client’s trades, right?

I mean, this is the same group that was peddling their clients sub-prime mortgage-backed securities products [right before the housing crisis imploded] while at the same time, having their proprietary traders bet against them with massive short positions.

It should not come as shock as to why Goldman Sachs is referred to as the “vampire squid” on Wall Street.

So as individual investors, we should take anything coming from what Goldman says publicly with a grain of salt.

Yet, could Goldman Sachs turning uber bullish--just at a time when markets are hitting all-time highs--be the right call? As investors, should we take their advice and maintain a strong bullish outlook on U.S. Equities?

That’s a great question; one where we can look to answers that don’t involve a blood sucking, slimy looking squid.

The “True Market” Holds the Answers

We can look to the market internals, or what we refer to as the “True Market” to find out whether Goldman’s call is truly a sincere opinion or perhaps something more nefarious in nature.

The NYSE bullish percent Index (BPI) is a medium to longer-term indicator of risk for the U.S. stock market.

So let’s see what the NYSE BPI has to say about Goldman turning uber bullish just when stocks are hitting new highs.

nyse bpi TMI

If you’re not familiar with the NYSE bullish percent chart, no worries.

It’s an oscillator that measures the percentage of stocks (within the NYSE Composite) that are trading on point and figure Buy signals.

The NYSE BPI is showing both short and long term bullish strength.

Right now the chart is in a column of X’s (highlighted in yellow at the far right).  This is an indication that a significant number [net] of stocks are moving to Buy signals and a sign of short-term bullish strength in the stock market.

But the BPI chart is also on a Buy signal (the previous column of X’s denoted by the green shaded box) which is a sign of longer-term bullish strength.

In other words, demand is in firm control of the stock market.

Also, the chart has been making higher highs (X’s), showing more and more stocks moving to buy signals.

In December, at the depths of the winter correction, fewer than 20% of the stocks were trading Buy signals.

But as the stock market began to recover following the Christmas Eve massacre, we’ve seen a steady rise of stocks moving to Buy signals with every surge in the S&P 500.

Now get this…

With the S&P 500 breaking out to new all-time highs and trading above 3,000 for the first time ever, you’d think that a high number of stocks would be on Buy signals.

But that’s hardly the case…

…actually far from it.

You see, even though the S&P 500 is at or near all-time highs, only 48% of the stocks in the NYSE Composite (less than half) are on Buy signals.

Remember, the NYSE BPI is an oscillator, so the range is from zero percent (no stocks on Buy signals) to 100% (every stock on Buy signals).

So with a reading of 48%, we’re at roughly midfield, near 50%.

Now here’s the thing…

The BPI is a barometer of risk.

For sure, the column direction is important (in X’s – demand in control, in O’s –supply is in control) but the “field position” is equally as important, sometimes more.

You see, with only 48% of the stocks on Buy signals, there is plenty of room for further improvement before reaching the high risk area of the field (70%).

So, if Goldman were making an uber bullish call at a time when the BPI was above 70% and in the red (high risk), I would be very skeptical of their true intentions. They could even be trying to lure in the last few suckers so they can be used as dumping ground for their traders to bet against.

But that’s not the case at all.

In fact, the NYSE BPI shows demand in control of both the short-term and long-term and is in relatively good “field position” which allows for more stocks to move to Buy signals before becoming overbought.

Summary

The breakout in July appears to be the real deal as we’re seeing positive confirmation in the “true market” (NYSE BPI), so I would have to side with Goldman Sachs on this one and think the chances of the S&P 500 moving even higher are favorable.

Of course, the market landscape can change.  It eventually will at some point in time.

But right now, risk assets (U.S. Equities in particular) are the strongest asset class and the one that investors should continue to overweight.

When the wind decides to blow and change direction, we’ll be sure to let you know.

Until then, stay long and strong!

Costas

Costas

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