Coiled Spring Capital Mid-week Report 12/20/23

The market saw quite the reversal today that has all the bears crawling out from their cave claiming victory. Comical since the same bears were calling for melt downs at the end of Oct. Up until yesterdays close, the market has seen some eye-popping performance. The Russell Small cap being the standout with a +21% gain.

There is an old adage on Wall Street that states, “being early is the same as being wrong.” While these same bears will never apologize for missing one of the fastest and strongest rallies in recent memory, they surely have no problem making top calls after one day of profit taking.

“How many top calls does it take for a bear to be right?”

Thats a joke. But seriously, it’s true.

Let’s review a few things for one:

Was the market excessively OB? Yes. Here is a chart of the bullish percent index, which is a measure of issues that have point and figure buys. This chart shows the extreme nature of the current move.

The RSI was the most OB since Aug 2020 and before that Jan ‘18. Both times preceded decent sized corrections, but in both instances the index went on to make a new high.

Sentiment per the AAII had reached overly exuberant levels.

And the indexes were bumping up against some very obvious resistance levels. Before the sell off, the SPX was 30 points away from an ATH, and up 7 weeks in row.

And one of our favorite contra-indicators is when notable bears become bulls after pressing the wrong directional case all year. We saw a few Mea culpa’s last week.

The glaring point is that it doesn’t take some genius market prognosticator to expect some profit taking or a retracement with the current stock market set up. In fact, we expressed caution about adding new exposure and not to chase over-extended names or the indexes in our weekend Macro Report. Markets don’t move in a straight line, and pull backs are healthy. The question now is, are we on the cusp of a trend change or is it just a speedbump to higher levels?

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