This week’s Barrons headline may be saying it all, demonstrating how bullish sentiment has become following the rise of almost 23% in U.S. stocks since October. Once again the bearish consensus of last summer and early fall has been caught offside by the stock market. Investors had become obsessed with the very real credit and banking problems in Europe which tended to mask the extensive list of positives that we have been outlining for some time (see the Boeckh Investment Letter, V. 3.15, November 3, 2011, where we pointed out that “the widely forecast death of the U.S. economic recovery remains premature”). The U.S. recovery is gaining momentum and the easing of financial tensions in Europe following the ECB’s dramatic move to make massive three-year loans to banks at 1%, was sufficient to propel global stock prices to much higher levels.
The bullish forces are still intact. Given the impressive shape of the bottom last August-October together with clear psychological extremes evident at the lows, the odds are that stocks will continue to move higher, barring a European debt catastrophe. The question is whether bullishness is starting to move to an extreme.