Our Love/Hate Relationship With a Rising Stock Market

A rising stock-market tide should lift all boats. Instead, it has investors worried.

The S&P 500 gained 0.4% today, just missing a new all-time high. The benchmark was boosted by the likes of Vulcan Materials (VMC), which rose 7.7% after beating earnings estimates, Newmont Mining (NEM), which rose 5.2% after getting upgraded, and base-metal producers like Alcoa (AA),which rose 7%, and Cliffs Natural Resources (CLF), which finished up 5%.

Today’s gained put the the S&P 500 up 24% this year. Yes, 24%. And not only that. If the year ended today, all ten sectors in the S&P 500 would be up 10% or more, note US Trust’s Joseph Quinlan and Ehiwario Efeyini, the first time since 1995 that the S&P 500 has gone 10 for 10.

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You would think that such big gains would have everyone feeling elated, like, “hey, my portfolio just gained 24% elated.” But no. Judging from the comments coming from strategists, from journalists, from my host at a weekend-lunch,  investors aren’t elated–they’re worried.

Take Citigroup’s Tobias Levkovich. He’s bull, he tells us but Citigroup’s Panic/Euphoria Model is “sending a clear warning sign of substantial complacency,” he writes. Levkovich continues:

Citi's proprietary sentiment tracker now has climbed to about its highest level since 2008 and it is approaching euphoria territory, which is worrisome…

The last time, Panic/Euphoria was in this area, which occurred in May, the market slid 3%-4% shortly thereafter. It is important to recognize that while euphoria readings have not been registered, there is still about an 80% probability of a market decline in the next 12 months based on the current reading. And, while the Raging Bull thesis remains intact for a secular bull market in stocks over the next few years, one has to respect gauges that have proven to be a reliable indicator of nearer-term share price movement.

Credit Suisse’s Andrew Garthwaite offers similar sentiments, writing that he sees “heightened risk of near-term consolidation…” He offers some reasons why, all the while ensuring that he still expects stocks to go up in 2014:

Some tactical indicators are signalling caution: The bull/bear ratio, director selling, and the gap between sector risk appetite and overall risk appetite have all reached extreme levels associated with marginal market falls on our back-tests. In addition, corporate net buying has slowed to zero (from 3% of market cap), again a precursor to consolidation.

But it’s also worth remembering that after all ten sectors gained 10% or more in 1995, the S&P 500 gained another 20% in 1996, then added another 28% in 1997.

So yes, worrisome. But not hopeless. Not at all.