I return from my vacation refreshed and clearheaded. Unfortunately, the short term market outlook is still a little murky. I believe the intermediate term outlook still favors the bulls, which is keeping me at a medium sized net long position.
In the short term we are becoming overbought. A rally into the weekend would make us overbought, although it would not be a great reading as we have chopped around for the past week. Sentiment has turned bullish but is not extreme. The EU has yet to put forward any viable solutions making us dependent on vague statements. The short term seems like a coin toss to me.
Looking a little further out, I believe the odds favor the bulls. The biggest positive the bulls have going for them is the continued strength in corporate profits which has led to share repurchases and cash M&A. As long as this continues it is difficult to imagine much downside. Large market participants such as hedge funds are under-invested. If they ever decide to return to more normal exposure levels there will be a lot of money coming into the market. Seasonality is especially positive this month and continues to be so in January.
I don't want to belittle the intermediate term risks. Europe is slowing down. Taxes will likely rise in the US just as fiscal stimulus is removed. However, these effects are unlikely to be felt for a couple of months and I will put greater weight on them as we move out in time or as market participants turn more bullish.