Extreme Confidence?

Given the winning streak we've had in the market, it is not surprising to see some cautious commentary about the stock market. In Richard Russell's Friday newsletter, which is being circulated around the message boards this morning, I found the following quite interesting:

"We are at present seeing a spate of extreme confidence, one of the most extreme in recent history. I'm not sure what this means, but we should know shortly. Personally, I prefer a market that's rising on rising fear rather than one that's climbing or rising confidence. I might add that as in every technical device there's a potential flaw. The potential flaw in the S&P/VIX ratio is that we never know "how high is high." However, if the S&P closes higher today with the VIX lower, the ratio will probably be at a record high in confidence. That would be enough to make me cautious, very cautious."

Meanwhile, there are quite a few others on the other end of the spectrum who see very good times ahead. Take for example this morning's research from Ned Davis who commented that "the Decennial Pattern shows that all years ending in "5" since 1885 have been higher, with an average gain of 30.7%!" I guess that is what makes a market, but given the low short-selling data out this morning, few could really dispute the idea that the market has a lot of confidence at the moment, something I talked about at length my newsletter.

Over the weekend, I outlined 12 convictions of the very bullish herd which have to hold up in the weeks ahead for this rally to be both sustained and built-upon. They include the following:

1) The employment picture is improving

2) The boom in oil prices is over - we're only days away from crude back in the low $30s

3) Higher interest rates really do not matter, and the Fed is almost done anyway

4) Technology spending will be stellar in 4Q

5) Iraq doesn't matter, unless of course, we win

6) Money inflows will continue to increase as investors get off the sidelines

7) Holiday retail sales will be blockbuster

8) The threat of terrorism is overblown

9) High government deficits and the falling dollar don't matter to the U.S. economy

10) Greenspan is right - the soft patch is history as you can see from the technical breakouts across the board

11) There is no bubble in real-estate

12) Bush will keep taxes low, fix the tax code, and save social security

In sum, that sounds like a tall order. While inflows trump everything, the herd must maintain their high level of confidence in each of these convictions for the money inflows to continue past the short-term.