It was only in early June that everybody was busy outlining the crash scenario. Back then the SPX traded at 2720, now we are 300 points higher.
The psychology of the masses has been extreme since October. The huge gyrations have managed shaking out most people. Nothing much has really happened, but the various narratives have changed, resulting in huge swings, both ways.
This last bull run started violently higher, but has transformed into a controlled melt up, frustrating most again.
Earnings have been coming in well, the geopolitical stress has faded recently, and US main indices have been putting in new highs.
It is interesting to note that several of the best performing asset managers, latest one Ray Dalio, have had a rough p/l period. The fundamental case for being a bear is as valid here as it was back in early June, but that has little to do with where markets are trading. Just as we wrote a few days ago, smart guys are bearish, so watch the upside.
We have no huge take on the markets here, but major indices are breaking higher and the crowd is very skeptical, usually perfect ingredients for a further squeeze.
Below are charts of SPX and NASDAQ, both putting in impressive break out charts.
Irrespective if markets are going to rip higher or not, the current set up is complex and risks sucking people into chasing trades. If you missed the latest bull, you probably feel like a loser, but chasing trades can often be fatal.
There is nothing wrong with chasing momentum or trying to short this, but we feel that given the complex set up here from a psychological point of view, the prudent investor must emphasize on the overall risk of the portfolio and manage the risk actively. This is always valid, but at times it should be of extra importance.
We have written extensively on managing and optimizing your portfolio risk. We recommend strongly that you review both the dynamic approach to managing your risk as well as how you potentially can use optionality in your portfolio. Given the recent implosion in volatilities, cheap options can be used for enhancing portfolio performance.
For risk management click here, and for options trading click here.
Source, chart by Tradingview