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Three Caveats to the Upside Run in Stocks

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See both sides as the year-end looms.

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Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

We've reached the halfway point of this freaky week as global indices "back and fill" recent gains. You know the drill; with mainstay indices up smartly this year -- the Dow Jones Industrial Average (INDEXDJX:.DJI) is up 22%, the S&P 500 (INDEXSP:.INX) is ahead 25%, and the Nasdaq (INDEXNASDAQ:.IXIC) is sporting a 30% return -- fund managers are "on edge" with 28 sessions left until the year-end letters are penned.

In recent sessions over on our real-time Buzz & Banter, we've paid homage to the technical landscape -- initial support resides at S&P 1775, with more meaningful supports down at S&P 1730 and NDX 3255 -- as we continue to respect the "long squeeze," with buyers higher and sellers lower into year-end. Perception is reality in the marketplace, and the masses have made a bet that current perception continues to manifest.

There are a few caveats as the bulls count their Benjamins. For one, the Investors Intelligence Advisor Sentiment Index finds 53.6% bulls and only 15.5% bears, which is near the prior peak of 55.2% bulls two weeks ago. That dovetails into the VXO (INDEXCBOE:VXO) chart below, which shows that "fear" is a kitten's whisker away from 25-year support. If the past is any prologue to the future, option hedges and/or stock replacements will prove to be smart strategies.



Another flag, for those who care of such things, is the price action in high-beta. Tesla (NASDAQ:TSLA), which was king of the world at $190, is suddenly the poster child of ambition gone awry, while other fliers, such as LinkedIn (NYSE:LNKD), Yelp (NYSE:YELP), Chipolte Mexican Grill (NYSE:CMG), Netflix (NASDAQ:NFLX) and Facebook (NASDAQ:FB) have become sudden battlegrounds. These names remain a proxy for performance anxiety as they are "bang for the buck" vehicles for those trailing their benchmarks.

We'll get the FOMC minutes this afternoon at 2 p.m. EST, which will be dissected in kind. Keep an eye out for any tangible shift in perception; while Ms. Yellen's Federal Reserve prides itself on wearing white feathers (read: remaining dovish), dissension in the ranks could rattle psychology in kind.

Random Thoughts:
  • The bears are cautiously optimistic that Monday was the start of a long-overdue decline. "Even a broken clock is right twice a day," said Boo the Bear as he adjusted his full-body cast. "I don't know anyone who is short these days -- negative, perhaps, but not short; being a bear has been too painful," he added. He's right, insofar as every dip has been shallow this year -- and they've seemingly gotten shallower as the year progresses.
  • Consistent with a long-held theme, societal acrimony continues to continue, be it overt (knockout -- really?) or otherwise (Twitter (NYSE:TWTR) wars). Thus far, "social mood and risk appetite" have not shaped financial markets; whether that's a function of the Fed, cumulative in cause and effect, or just plain wrong remains to be seen (and yes, if the final score was tallied today, it would be flat-out wrong).
  • I can add "trips to the dentist" to my list of pet peeves, along with close talkers, loud chewers and long lines. Be that as it may, I will again venture to "the chair" this Friday for what I hope will be the last trip in a while; four times in one week fills my quota for the year, as those things go.
  • The BLS is manipulating employment data? Yawn. That's right up there with the invisible hand being "news" back in the day.
  • Bitcoin? Reminds me of when analysts starting measuring eyeballs in Y2K. It was generally accepted (or, rationalized) but in hindsight, it was rather silly.
  • Homeland isn't doing it for me this season, but perhaps that's because Jack Bauer set such a high bar!
  • What do the recent high-profile talking-head contracts in the financial space mean through the lens of social mood?
  • When will Twitter pass Facebook on a pure price basis?
  • Remember when the floor of the NYSE had more traders than media personalities?
  • What is it about years ending in "3"?
  • Do you really think the Federal Reserve will be able to control interest rates forevermore?
  • Doesn't that fly in the face of everything we've learned about a "free" market?
  • If we synch your time horizon with your risk profile, can't we take that journey one step at a time? (Yes.)
  • I recently scribed Stock Market Trading: 20 Rules of Engagement, which is 23 years' worth of trading tidbits wrapped into a single URL. Hope you enjoy it....
  • 100% of net proceeds raised by The Ruby Peck Foundation for Children's Education will be donated to Typhoon Haiyan relief. For those interested in paying it forward, this is as worthy a cause as any right now. Thanks!
R.P.

Twitter: @todd_harrison

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