Rally Maturing

There is increasing evidence that this rally is no longer in its nascent stages. Last week, I laid out a few changes in investor sentiment showing investors moving away from their state of extreme pessimism. Since then more evidence has piled up that the conversion of the masses from bears to bulls continues. Insiders have turned sellers and the put/call ratio showed a big increase in call activity on Friday. I still favor the long side as we are a long way from extreme optimism and seasonality is turning positive but it is time to be more vigilant.

The chart below is from Thomson Reuters via Barrons:

Since August insiders have been "backing up the truck" but last week they began to "feed the ducks" in earnest. The CBOE equity put/call ratio dropped to 0.50 on Friday which is a level that signifies extreme call activity. This might have been expiration related but we certainly were not seeing those type of numbers a month ago on any day.

I believe that the strong seasonality and the still under invested hedge funds should keep this rally going. However, sentiment is now less of a positive for this market and gains will be harder to come by. Typically rallies that begin with extreme pessimism end with extreme optimism. By that measure we are not at the end of this rally but we are certainly closer.

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