The U.S. stock market has been defiantly bullish here lately despite continued bearish sentiment among the media and analysts. I now think the amount of negative sentiment out there (in the midst of a rally) is the greatest I have seen since 2009.
I think the reason the market is rallying so decisively in the face of negativity is that, prior the current rally, it had begun to price in a recession. Typically, in order to come to terms with the prospect of recession, the market has to fall 15-25%, and the recent correction entered that range. So, right now, any non-recessionary news is bullish (short term moves aside), which I think explains the market’s resiliency on Thursday despite a GDP report showing only 1.5% growth.
After the 2009 low, the S&P 500 rallied 25%, then had a 6% pullback. After the 2011 low, the S&P rallied 20%, then had a 10% pullback.
Currently, the S&P has rallied 12% since the September low. I’m guessing the current rally will continue the progression of being a little weaker than the previous rally off a major low. If we get back to the May high of 2134, that would be a rally of 14% off the September low which fits the progression nicely.
Assuming we hit a temporary peak around 2134, the S&P would drop 5-10%, if it follows historical precedent.