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Record Business Optimism Keeps the Market Running Higher For Now

Bears will view the record level of the NFIB Small Business Optimism Index as a contrary indicator, but trying to time the market on the basis of such data is impossible.
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The most interesting headline this morning is that the NFIB Small Business Optimism Index has jumped to 108.8, which is the highest level ever recorded in the 45-year history of the survey. That optimism is reflected in small business hiring plans, which are the highest recorded.

I've not seen any studies of the correlation between small business optimism and performance of the stock market, but it is interesting to look back to the last time the NFIB Optimism Index was this high. In August 1983 the index hit 108 under President Reagan. That came after the market nearly had doubled off the lows hit in the summer of 1982.

In August 1983 the Dow Jones Industrial Average (DJIA) dipped slightly to around 1150 when the record optimism was recorded. It then rallied into the end of the year and hit a high around 1300 in December 1983. That was the short-term top and the DJIA did not return to that level again until February 1985.

It is only one case, but in that situation the market top occurred within four months of a very high level of business optimism.

The conditions are much different this time, but the primary lesson is that high levels of optimism occur well into a big move and are likely to occur fairly close to a top.

There is no reason to try to anticipate a turning point right now. If anything, the positive optimism is likely to keep this trend in place and is a good setup for a rally into the end of the year. Early next year likely will hold much greater potential for a market turn.

The economic optimism that exists is probably the best explanation for why the market refuses to embrace the negative narrative that the bears keep trying to promote. Trade wars, interest rates and politics just don't matter when business is strong enough to create a desire for more hiring.

The bears will view this high level of optimism as a contrary indicator, but trying to time the market on that basis is impossible. As I keep writing, we have to stay focused on the price action. It is a bit choppy, but there is obviously underlying support and no sign of sustained selling pressure.

One thing that helps this market that doesn't receive much attention is how the business media under-covers the positive economic story. It is largely a function of media bias, but we don't see many front-page stories about the record volume of optimism. The stories tend to have a negative bias and focus on issues such as the chances that President Trump will be impeached or how trade wars will be a disaster.

That negative bias in the media helps to create a wall of worry for the market to climb. When the market doesn't go down on the negativity, prudent market players have little choice but to look for something to buy.

We have a negative open this morning but it has been a very mixed and choppy market lately. I don't expect any major trend to develop right now and my main focus is on being patient as setups for a rally into the end of the year develop.