In the short run, sentiment and momentum drive everything in markets. We have a conflicting backdrop with respect to these factors heading into year-end.

On the cautious side, sentiment once again reached optimistic extremes last week.

The spread between Bulls and Bears in the Investors Intelligence poll came in at 39.5%, the 94^th percentile of such readings.

The spread between Bulls and Bears in the AAII Sentiment poll is also elevated at 37.6%, or the 96^th percentile historically.

Such extremes are typically associated with below average forward returns for equities as illustrated in the tables below. While returns are still positive on average, you tend to see a more range-bound market when everyone is already in the bullish camp.

On the positive side, however, is momentum and seasonality. ‘Tis the season where investors tend to chase the first 10 months returns into year end. In years where the S&P 500 was up over 9% on the year heading into November (as is the case this year), the average November-December return is +4.5%, with 83% of years positive returns into year-end. We have never seen a down year for the S&P 500 when it has been up more than 9% heading into November.

We can contrast this tendency with years in which the S&P 500 enters November with a negative return. In such years, the average November-December return is -1.5% with only 48% of years posting a positive return. When the S&P has entered November with a negative YTD return, it has finished the year in positive territory only 10% of the time.

Sentiment vs. Momentum

As was the case in 2013, the momentum heading into year-end is favorable for the Bulls and at the very least will be a difficult backdrop for Bears to push back against. There is little historical precedent for a large down November-December when the market has had strong YTD gains leading up to these last two months (the worst example by far in this sample was 2007 when the S&P 500 declined -5.2% in November and December).

If we look past the duration of the year, though, sentiment is likely to become a more important factor. The strong momentum of today is not in any way lost on investors as reflected by their extreme love for stocks with a dearth of Bears. In 2015, this could lead to a more difficult, range-bound market environment until the overbullish sentiment condition is alleviated.