I happened to turn on CNBC at the 3pm hour today in order to get a grasp on where market sentiment was currently vibrating. Despite the S&P being down a solid 50 basis points and small caps posting their biggest losses in over 2 months I proceeded to hear the most bullish set of punditry in recent memory. A small sampling.....

"The US consumer cannot be underestimated, consumer spending continues to drive this economy"

"Pullbacks will continue to be shallow. There is still a lot of cash on the sidelines...."

"There is no reason to be bearish on equities."

"I don't see any reason to expect anything different, the uptrend is still intact."

"Pullbacks have been shallow, and a correction would be a tremendous buying opportunity anyway."

This is just a small sampling of the jaw-dropping bullishness which I heard - some of which sounds like an exact repeat of the conversations percolating in October 2007. However, a couple of things struck me as especially noteworthy:

  • An impressive array of cognitive biases were exhibited by the pundits, most notably confirmation bias and recency bias
  • Normally the talking heads will "now-cast" their commentary to fit what is occurring on a specific market day. This panel was not fazed in the slightest by the solidly red equity session and the drubbing in small caps - this speaks to the conditioning which this market has instilled within market participants

While this is simply a snapshot of a sliver of market sentiment (admittedly from several people who do not invest their own money in the market), it speaks to the overall market psyche and the growing 'bandwagon effect' which is taking place.  It's as though a "bullish fever" has taken hold from which nobody is immune.

If one were only able to use one signal in order to identify a market top, a sharp divergence between price action and market sentiment would have to be at the top of the list. Today we have an undeniably clear bearish divergence between price action and real time sentiment taking place the session after the S&P 500 posted its 3rd consecutive all-time high.

IWM_Daily_7.7.2014

The most bearish candlestick in small caps since April did not faze the collective CNBC punditry