The Bull Case Has Two Problems

Since the beginning of October, the market has performed better as a “Fed Pivot” bull case pushed investors into the market. We previously laid out the case for a strong “short squeeze” around the lows of September, stating:

“Currently, everybody is bearish. Not just in terms of ‘investor sentiment’ but also in ‘positioning.’ As shown, professional investors (as represented by the NAAIM index) are currently back to more bearish levels of exposure. Notably, when the level of exposure by professionals falls below 40, such typically denotes short-term market bottoms.

As a contrarian investor, excesses get built when everyone is on the same side of the trade.

Everyone is so bearish that the reflexive trade will be rapid when sentiment shifts."

Bull Case, The Bull Case Has Two Problems

The ensuing short squeeze ultimately produced one of the most significant gains on record, with the S&P 500 surging over 5% single day. As we noted, such gains have two primary features. First, they are generally only seen during bear markets. Secondly, while they tend to come in the latter stages of bear markets, they don’t historically denote THE bottom.

As noted, we expected the rally from the September lows, as discussed in that previous post. However, what was critical was our concluding statement.