The trap ahead for a stock market too full of animal spirits – MarketWatch

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A day after confidence data ripped to 16-year highs, taking stocks along for the ride, some are asking if investors have gotten a little too spirited away.

“Barely one day on, and we find ourselves on the opposite end of the spectrum, where traders are scrambling over each other to buy this dip,” observed Cracked Market’s Jani Ziedins in a blog post.

Tuesday marked the best bounce for the Dow DJIA, +0.73% and S&P 500 SPX, +0.73%  since March 1 and March 15, respectively, sparking fresh talk of so-called animal spirits.

That brings us to our call of the day from JonesTradings’s chief market strategist Michael O’Rourke, who senses trouble in a disconnect between soft data (consumer confidence, PMIs) and the hard stuff (GDP inflation, jobless levels).

The softer numbers have been “stronger than the hard data throughout the entire recovery,” a divergence that has deepened since the election, longtime bear O’Rourke told clients in a note.

He then turns to one component of the confidence data, the “Expectation of Stock Price Increases,” which hit 47.4 in March. That’s the second highest reading on record in nearly three decades, beaten only by a January 2000 reading of 47.7.

JonesTrading, Bloomberg,

O’Rourke says while it’s hard to say “today’s euphoric sentiment, matched only by the equity bubble in 2000, is a clear market signal,” he does point out some troubling historical markers.

March marks the fourth straight month of readings above 45 for that index, the longest streak on record. You have to go back to spring 1998, just before the Russian Debt Crisis and failure of hedge-fund firm Long Term Capital Management, for anything near that — a three-month run at those heights. And two straight readings above 45 preceded the 1987 crash, notes O’Rourke.

The first reading above 45 typically is followed by a 1.2% loss for the S&P within the next three months, and a 3% loss in the next six months, according to the data.

Given the S&P is up 5.35% year to date, it’s unlikely the index will deliver that kind of loss by June, but the expectations streak is “yet another warning sign flashing the high level of risk in this market,” O’Rourke says.

Back to Cracked Market’s Ziedins, who believes investors are facing a stock conundrum: “I want to trade, but at the moment the upside momentum is too strong to short, and this rebound too fragile to buy,” he says. Wait for the rebound to fizzle.

Key market gauges

Spirits are struggling in premarket, with Dow industrial YMM7, -0.05%   and S&P 500 index futures ESM7, -0.03%  sagging a bit.

Gold GCM7, -0.29%  is down, while crude CLM7, +0.51%  is heading the other way.

So here we go. The start of Brexit talks may now officially begin, putting a U.K. exit on course for early 2019. The pound GBPUSD, +0.0803%  is under some pressure.

Read: How to trade the pound as Brexit trigger is pulled and What is that on the new £1 coin

Plus: Three ways Article 50 is likely to change Britain — and Europe

See the Market Snapshot column for more.

The chart

Get out of this market too fast and you miss out on gains, Bank of America Merrill Lynn strategist Savita Subramanian recently told clients. But piling in at the last minute isn’t such a great idea either, she warned.

Below is her chart showing gains for the S&P 500 just ahead of a market peak, going back to 1937. It reveals that returns at the last year of a market cycle make up a disproportionate chunk of returns from the entire cycle.

Read more on why long-term stock returns look so gloomy, from MarketWatch’s Anora Mahmudova, as well as some tips on where investors should divert to instead of going the whole hog on U.S. stocks.

The economy

Pending-home sales hit at 10 a.m. Eastern Time, but Federal Reserve speakers take the spotlight today. Chicago Fed President Charles Evans appears at 9:20 a.m. Eastern, Boston Fed President Rosengren at 11:30 a.m. and San Francisco Fed President John Williams at noon. Rosengren will also be interviewed by Bloomberg, starting at 1:45 p.m.

The buzz

Vertex Pharma VRTX, -1.24%  is soaring after upbeat study results for a cystic fibrosis treatment.

Leaving four half-finished U.S. nuclear reactors, Westinghouse Electric has filed for bankruptcy protection, says Japanese parent Toshiba 6502, +1.01%  .

The EU’s antitrust watchdog has blocked the London Stock Exchange’s planned $28 billion merger with Deutsche Börse.

Semiconductor group MaxLinear says it’ll buy rival Exar for about $661.6 million in cash.

A breakthrough treatment for multiple-sclerosis from Genentech has been approved by the FDA, but check out the $65,000 per-year price tag.

Shipping stocks? The bottom has been called. And get ready for the market’s first marijuana-themed ETF to start trading next week.

The quote

“I think we’re closer today to repealing Obamacare than we’ve ever been before, and surely even closer than we were Friday.” — House Republican whip, Steve Scalise of Louisiana.

Scalise was speaking on the restart of negotiations to replace the Affordable Care Act, as reported by the New York Times.

The stat
Shutterstock

382.58 tons — That’s the amount of gold reserves unearthed by China’s Shandong Gold 600547, +0.22%  in eastern China. It could be the country’s biggest gold find ever, reports Bloomberg.

Those running the mine have told Chinese authorities that gold volumes could soar to more than 550 million tons, once exploration is completed in two years.

Random reads

“Dreamer” posts her tax return, challenges Trump to do the same. Draws haters.

Disney DIS, +0.60%  on “Ralph Breaks the Internet” — the sequel to the hit “Wreck-it Ralph”:

Trump tweets got you down? Here’s one way to vent.

White House spokesman Sean Spicer sparks uproar over #BlackWomenAtWork

Who knew old 9-volt batteries were a fire hazard?

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