Optimism should support one last share price spike

It is interesting to read that optimism among US stock investors is pretty high at the moment, despite three weeks of falling stocks and another sell off on Wall Street yesterday.

Some might take that optimism as a contrary indicator, saying that a top can not be called until optimism is at a peak. Reading investor psychology is always controversial but very relevant in any market.

Bull charge

My feeling is that having all this optimism among investors suggests that there will be one last share spike in this bear market rally, or cyclical bull if you prefer that nomenclature. It is a question of judging the animal spirits right: look that bull in the eye, does it have one last charge left?

So put yourself in the seat of these optimists, indeed you might be among them as they are clearly numerous. Would you not see a market pull back as an opportunity to jump back in and ride this bull higher?

Assuming that enough of your fellow bulls also decided to charge then this could end up looking something like a minor stampede. And there is nothing like one bull tipping off another to reinforce a trend.

So that would give us a short and powerful move upwards after what could be interpreted as a necessary correction in a cyclical bull market.

However, if you remain in the secular bear market camp then this should be seen as a terminal blow-off, which is actually exactly what you would expect to see at the end of such a sharp rally, and has been seen many times before.

Historical precedent

It will be no different this time, and the smart guys will be the ones using this cue either to exit the markets and sit in cash, or to short the whole thing.

For going back to fundamentals: there is no economic recovery. The market has priced in a recovery. Once the market realizes its error of optimism then there is going to be one almighty crash to an error of pessimism position.

Do you want to be on the right side of this curve?