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There's an old
market saying that positions tend to match convictions. If investors are
bullish, it's (naturally) assumed that they are betting on the upside, and
vice versa.
However, if
things reach a point where too many are positioned in the same way, especially
where price trends have reinforced those views, it has often set the stage
for a sudden and occasionally violent move in the other direction. That's one
reason why many market-watchers try to keep tabs on sentiment.
While the
relationship between what people say and what they do has been somewhat
undermined by the unprecedented interventions of the Federal Reserve (and
other authorities) in various markets, the wild market gyrations of the past
decade, and a growing cacophony of commentary about where prices are headed
next, that doesn't mean traditional sentiment gauges no longer matter.
Most likely, it
means that the bands that have historically marked optimistic or pessimistic
extremes have either widened out or, in the case of the "Bernanke Put"-type
equity market environment we have now, shifted upwards.
Still, while
caution is warranted when it comes to assessing the significance of any one
indicator, when you reach a point where a growing number of them are telling
a similar story -- even if some haven't quite hit their "new
normal" extremes -- then it tends to confirm that too many in the
trading crowd are leaning the same way -- and that a contrarian reversal is
at hand.
With that in
mind, it's hard not to read the following reports (and accompanying graphs)
as anything other than a sign that the current rally is on very shaky ground
-- especially when expectations are as high as they are that the Fed and/or
the ECB and/or China and/or Apple will do or say something positive for
stocks:
"This Is
The Most Bullish Moment We Can Recall Since The Financial Crisis Ended" (Business
Insider)
Markets are
down a hair today, but the theme of the morning is clear: Uber-bullishness.
Everywhere.
This is the
most unanimously bullish moment we can recall since the crisis began.
Note that this
comes as U.S. indices are all within a hair of multi-year highs, and the
NASDAQ returns to levels not seen since late 2000.
"Late-Stage,
High-Risk" (Hussman Funds Weekly Market
Comment)
For investors
who don’t rely much on historical research, evidence, or memory, the
exuberance of the market here is undoubtedly enticing, while a strongly
defensive position might seem unbearably at odds with prevailing conditions.
For investors who do rely on historical research, evidence, and memory,
prevailing conditions offer little choice but to maintain a strongly defensive
position. Moreover, the evidence is so strong and familiar from a historical
perspective that a defensive position should be fairly comfortable despite
the near-term enthusiasm of investors.
There are few
times in history when the S&P 500 has been within 1% or less of its upper
Bollinger band (two standard deviations above the 20-period moving average)
on daily, weekly and monthly resolutions; coupled with a Shiller
P/E in excess of 18 – the present multiple is actually 22.3; coupled
with advisory bullishness above 47% and bearishness below 27% - the actual
figures are 51% and 24.5% respectively; with the S&P 500 at a 4-year high
and more than 8% above its 52-week moving average; and coupled, for good
measure, with decelerating market internals, so that the advance-decline line
at least deteriorated relative to its 13-week moving average compared with
6-months prior, or actually broke that average during the preceding month.
This set of conditions is observationally equivalent to a variety of other
extreme syndromes of overvalued, overbought, overbullish
conditions that we've reported over time. Once that syndrome becomes extreme
- as it has here - and you get any sort of meaningful "divergence"
(rising interest rates, deteriorating internals, etc),
the result is a virtual Who's Who of awful times to invest.
"Investor
Sentiment: Don’t Become Roadkill"
(The Technical Take)
The “Dumb
Money” indicator (see figure 1) looks for extremes in the data from 4
different groups of investors who historically have been wrong on the market:
1) Investors Intelligence; 2) Market Vane; 3) American Association of
Individual Investors; and 4) the put-call ratio. This indicator is bearish,
and just above the extremely bullish level.
Figure 1. “Dumb
Money”/ weekly
Figure 2 is a
weekly chart of the SP500 with the InsiderScore
“entire market” value in the lower panel. From the InsiderScore weekly report: “We continue to see
moderately high levels of selling across the market but as we noted last
week, from a historic perspective the volume of activity is not particularly
egregious. Nonetheless, there is obviously far greater conviction amongst
sellers as compared to buyers as the quality of buying events has been
generally poor over the past several weeks. “
Figure
2. InsiderScore “Entire Market” value/
weekly
Figure 3 is a
weekly chart of the SP500. The indicator in the lower panel measures all the
assets in the Rydex bullish oriented equity funds
divided by the sum of assets in the bullish oriented equity funds plus the
assets in the bearish oriented equity funds. When the indicator is green, the
value is low and there is fear in the market; this is where market bottoms
are forged. When the indicator is red, there is complacency in the market.
There are too many bulls and this is when market advances stall. Currently,
the value of the indicator is 71.55%. Values less than 50% are associated
with market bottoms. Values greater than 58% are associated with market tops.
It should be noted that the market topped out in 2011 with this indicator
between 70% and 72%.
Figure
3. Rydex Total Bull v. Total Bear/ weekly
"Cash No Longer King? Investors Buying
Stocks Again" (CNBC)
Cash levels in
portfolios have fallen to a 15-month low, according to one survey that
suggests a thawing in investor sentiment even as the market enters its
historically worst month.
As the Standard
& Poor's 500 added another 2 percentage points in August to its 12
percent year-to-date gains, investors dropped cash levels to 18.1 percent of
their portfolios, the lowest since May 2011, a poll
from the American Association of Individual Investors showed.
The shuffling
coincided with a 0.7 percentage point increase to stocks to 60.5 percent of
total portfolios, and a 2 percentage point increase to bonds to 21.4 percent.
The moves
represent respective four- and six-month highs and come as September, with
its traditionally negative returns, looms.
"How
Hated Is This Rally?"
(The Big Picture)
The objective
measures shown below like the Investor Intelligence survey (first chart
below), the VIX (second chart below) and the Commitment of Traders report
(third chart) show nothing even close to what the article contends. If
anything, this rally is getting overbought because of too much optimism.
Michael J. Panzner
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