The Bears Are Deep in Their Caves

NEW YORK (FMD Capital Management) -- There is no denying this stock market's resilience over the last year. Every modest pullback is bought in earnest as investors throw caution to the wind, and demonstrate a voracious appetite for stocks. Despite the threats of government gridlock and overseas conflict; plunging commodity prices and an uncertain central bank future, traders have continued to reap the rewards of rising equity prices.

It may not seem logical -- considering the odds stacked against an extension of this rally. However, the stock market is rarely a logical animal. Instead, it is a beast that climbs a wall of worry despite all compelling evidence to the contrary. Don't ever say that the stock market can't go higher, because it can and it will when you least expect it.

This weekend marks the one-year anniversary since the SPDR S&P 500 ETF ( SPY) last fell below its 200-day moving average. The trend has most certainly been our friend over the last 52-weeks. You would have to go back two years on the chart to see this bellwether index having spent more than a week below its long-term moving average.

Courtesy of StockCharts.com

Moves such as these spur the use of buzzwords such as "bubble" and "frothy".

Another interesting fact, brought to my attention by Ryan Detrick of Schaeffer's Investment Research, is that the latest Investors Intelligence Poll now marks the percentage of bears at just 15.5%. According to their research, this is the lowest reading since March 1987 which indicates that the ursine crowd is now in deep hibernation.

For sentiment purposes, a low number of bears typically mean we are close to a market peak. Simply put, if everyone thinks stocks are going up, there is no one left to buy.

However, Detrick is quick to point out in his analysis that the low percentage can persist for quite some time and is nowhere near the all-time historical low. It's a statistic that is worth noting, but hardly an iron-clad reason to go to cash at this point in time. Trying to time a market top can be an exercise in futility.

Other recent market observations worth mentioning include the shift in momentum from the iShares Russell 2000 ETF ( SPDR) to the SPDR Dow Jones Industrial Average ETF ( DIA). Small-cap stocks have been leading the majority of the year, but have surrendered momentum to larger blue-chip names -- which may be a sign that we are seeing profit taking in high beta areas, and a rotation into more stalwart defensive names. Another chink in the bull's armor, maybe?

At the end of the day, we're still seeing record inflows to equity-related ETF and mutual funds as performance chasing investors throw in the towel and opt for risk over safety. These moves may ultimately prove to be ill-timed, but are a symptom of the typical psychological action that we see through every peak in the market cycle. Greed and fear are powerful motivators.

My recommendation for your portfolio is to stay balanced and continue to ride the trend as long as it is intact. I am not seeing a pressing need to get more aggressive or defensive, at this time, until either a breakout or breakdown in recent consolidation comes into view. A step back below the 50-day moving average would be a warning sign for stocks and give us an indication that we are seeing a confirmation of downside risk.

Another key indicator to watch will be interest rates as we make our way through the transition of the Fed chairman role. Both stocks and bonds are likely to get volatile in the wake of monetary policy changes. That is why it is key to have a solid risk management plan in place to lock in gains when the tide turns and prepare for new opportunities.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

David Fabian is a managing partner at FMD Capital Management, a fee-only registered investment advisory firm specializing in exchange-traded funds. He has years of experience constructing actively managed growth and income portfolios using ETFs. David regularly contributes his views on wealth management in his company blog, podcasts and special reports. Visit www.fmdcapital.com to learn more.

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