Behold the beauty of this
Most Optimistic on Stocks in 3-1/2 Years in Poll
I was reviewing this mornings news items the above headline stuck
out like a sore thumb.
A little stroll down memory
In May of 2012 NFTRH 188 used
this graph among other indicators to get bullish on a risk vs. reward basis,
stating and then
there is this beauty
the dumb money has lurched hard to risk off.
Smart/Dumb money confidence,
I personally took some pretty
good grief for writing Dumb
Money Sold in May and Went Away over at Contrary Indicator Central AKA the Seeking Alpha comments system to the version of the article
published at SA. The most
memorable of the responses by defensive bears was Gary = Dumb Investor. I considered these comments to
be of great value, because to be an effective contrary market player you
must, almost by definition, appear dumb to most people a lot of the time.
This bullish orientation,
although very difficult to maintain during last summers volatile ups and downs extended
through year-end, with another personal watershed sentiment anecdote coming
at Thanksgiving, when an extended family member and CFA advised that all the
best fund managers he dealt with were mostly in cash and expecting a Fiscal
Cliff-related market crash in December.
Here is the current state of
sentiment (both graphs courtesy of Sentimentrader.com):
Smart/Dumb money confidence,
We have ended the bullish risk
vs. reward regime, although the model portfolio continues to hold some global
bull positions. It is obvious that confidence is being restored and
those same fund managers are now chasing the broad US stock market higher.
This is of course a recipe for
near term destruction of bears who are actively positioned against the market
because right now, momentum and a heck of a lot of dumb, greedy money are
propelling it higher, with all sorts of happy media stories providing a tail
wind. That is the short-term.
Longer term, especially
considering that the current sentiment structure has degraded significantly
(from a contrarian view) and that long-term Treasury yields are likely to
rise with asset markets, this momentum should burn itself out before too
A long-standing potential
target for the S&P 500 is 1550, and this could extend up to new all time
highs above 1576. Yet still, the market is very bearish on a risk vs.
Yet I am not so much talking
about the proximity to a potential triple top, the state of the monthly MACD
or any other technical signs when offering a bearish view for 2013. I
am talking about human herding behavior; not among NFTRH subscribers or readers
of this site. Nor am I talking about the readers of some websites that
may publish this article.
But think about the great
investment and fund manager herd out there under pressure to invest OPM
(other peoples money). Think about the Goldilocks backdrop
that has taken center stage now that weve
gotten through the Fiscal Cliff non-event. The backdrop comes complete with a
rolled over Federal Reserve, continuing to promote inflationary policy with
few signs of inflation, which are always lagging to the public.
a new and great contrarian phase of bullishness! thinks the investment management herd
as the financial media that so reinforced bearish perceptions in 2012 goes
the other way toward full perceptions-reinforcing bull horn mode.
The new story that the
mainstream seems to be pumping is that the VIX (what some people call the
fear gauge) is no longer relevant. Well it was pretty relevant at each
of the last three spikes. Although notably, VIX has broken a support
level here. If it remains below that level, the trudge toward an
actively bearish stance against the market could be long and tedious, just as
the white knuckled bull stance was last spring and summer.
The bottom line is that sentiment is very definitely
aligned in a bearish risk vs. reward structure now. But this condition
can endure and people who are invested should at least be aware that the
backdrop is becoming unhealthy in its over bullishness. It is possible
that a good interim correction will come along and clean up the sentiment
backdrop. In that event we will be open to a more bullish 2013, if
other components of the analysis indicate a positive view.
But the longer the current
situation remains as is, the more dangerous the market becomes with the
likelihood that the next correction could be severe at best, or more likely
the end of the cyclical bull market and start of a new bear. So move
forward aware of the current sentiment backdrop. Its mirror image worked out last year.
Free eLetter, NFTRH