What Makes This Bull Market So Resilient?

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By Simon Maierhofer

NEW YORK -- The average age of a bull market is 39 months. This bull market is already 76 months old. Although it has one foot in the coffin, this bull keeps hanging on.

What makes it so resilient?

Many investment pros and celebrities predicted a market crash already last year (click here for a list of infamous "crash prophets" humiliated by Mr. Market).

Ironically, the persistent bull-market heckling is exactly what keeps the market going. How so?

The stock market needs new buyers to keep going higher, like a fire needs wood. Every person who "heckles" the bull market is a potential buyer. Yesterday's heckler is tomorrow's buyer.

How many investors who taunted the market in 2013 are still on the sidelines now? Few forces are as persuasive as rising prices, and nobody likes to be left behind.

My September 2013 article "Who or What Can Kill this Bull Market" observed that phenomenon and stated the following:

"A watched pot never boils or a mistrusted market never tops. Every time stocks decline a bit, investors think: 'That's it, the gig is over.' But the propensity for investors to turn instantly bearish is likely to keep sell offs contained."

Bull markets climb a wall of worry. Pessimism is like fuel for stocks, and the same mistrust that was present in 2013 still exists, although there's one condition that's in place now, which wasn't in 2013 (more on that toward the end).

Here are a couple of charts that illustrate current investor sentiment.

Retail Investors

Last week, retail investors polled by the American Association for Individual Investors were about the most bearish they've been in years.

The pessimism we saw last week is unusual, especially when considering that the S&P 500 is still within striking distance of its all-time high.

Option Trader

The chart below plots the S&P 500 against the Chicago Board Options Exchange equity put/call ratio, a measure of option trader sentiment. Call options are basically bets on a rising market, while put options benefit from falling stocks.

The ratio between put and call options showed that option traders purchased more than 0.78 puts for every call earlier this week. That is the second highest ratio in years. Option traders are afraid of lower prices.

In other words, many market participants are expecting a market top, an outright crash, or at the very least a correction. But the market rarely does what's expected.

Under normal conditions, this kind of pessimism would be reason to buy.

As mentioned earlier, unlike in 2010, 2011, 2012, 2013, 2014 and even the first quarter of this year, the stock market is showing the early warning signs of a major market top. That may neutralize the normally bullish effect of investor pessimism, as this S&P 500 deep-tissue analysis shows.

This article is commentary by an independent contributor.
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