If you are subscribed to any weekly investment newsletter, I am sure you have been receiving e-mails with "big concerns about today's bullish environment" since 2012, almost immediately after the Great Recession recovery. The truth is simple: there are always too many reasons to sell. However, maybe, is it high time to go short? Let us look at what is going on now - clear facts only.
We could talk for days whether QE works or not, but the data shows the US economy does not demonstrate a steady bullish dynamics.
Although the current economic conditions are far from unstable, there is still some space for concerns. For instance, labor market, inflation, and GDP. If the unemployment dynamics demonstrates the lowest jobless rate for the last 16 years (the last reading is 4.3%), the inflation rate keeps the investors' expectations far from absolute positive with its negative dynamics. Two consecutive lower-than-expected readings in April and March caused concerns about the Fed's policy efficiency. As far as GDP dynamics is concerned, I would not say it is bleak, but the data chart below shows how unclear its dynamics is.
The economy can be considered healthy when there are stable prices and full employment with sustainable growth. At least for now, labor market, GDP, and inflation indicate that the growth pace is neither weak nor strong. It causes the Fed to talk in a more dovish way, while the market expects it to be more aggressive. The Fed officials even told about the commitment to act more softly, if the current inflation downtrend carries on.
What tells us the market chart (NYSEARCA:SPY)? It is very useful to carry out a deep market study with trend lines analysis, Elliott waves and chart patterns, but the today's market environment can be perfectly described by 3-5 moving averages.
The chart above looks like the trend is not about to change the direction. No signs of the long-term bearish trend at all. During the last four years, the actual price movement was at a reasonable distance from the moving averages. Investors saw the first touch only in the first half of the 2016 year. Nevertheless, the market rebounded very quickly and continued its pace to the new highs.
In addition, it is important to note that we have seen an interesting market case not far from now, when gold, bonds, stocks prices have moved in the same direction together. A common belief that the price of safe haven assets should move in the opposite direction to the risky assets (such as stocks) fails the reality test. The market performance shows that this situation is still bullish for stocks, but the market participants are considering the future too unclear to meet it with stocks only. It means the general market sentiment is starting to shift.
To short or not to short?
To sum it up, the primary economic indicators do not show a strong bullishness. Although the unemployment rate dynamics is impressive, it would be a big mistake to miss the mixed GDP growth readings and the slowing inflation (it frustrated market twice in a row with its lower-than-expected readings). However, I would like to emphasize, it all indicates the only thing: the growth is moderate, not explosive.
As far as the market is concerned, one cannot deny that the market participants have very big expectations. The market systematically hits new highs one by one with no indication of the upcoming reversal. The other side of the coin is, however, that the market sentiment starts shifting a little bit (the recent rally in stocks, gold, and bonds confirms this idea), but it can hardly be a direct bearish signal.
It all leads to the conclusion that we can see the new market highs soon. Indeed, the market looks strong enough, the general data is not so bad - why do we need to short now?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.