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Investor Sentiment: It's Odd, But True
Market participants remain all giddy about the bullish developments of the past months. Yet, one year ago, a level of 1200 on the S&P500 had everyone in a panic, and this was before a 20% two week plunge. On Friday, with the SP500 closing at 1068, everyone is now ecstatic and most investors see nothing but blue skies ahead even though the fundamental outlook is just as muddled as 12 months ago. It's odd, but true. Two different investor outlooks but essentially the same level on the S&P500. So what has changed?
Investors' perceptions. It's where we have been (S&P500 ~666), where we have gone (S&P500 ~1068) and how fast we have gotten there (over 6 months) that investors attach significance too. It's not the fundamentals. It's not the values. It's the change in price and the hope that the market is forecasting what most of us cannot see: a robust economic recovery.
I can understand the buying at the March, 2009 lows. There was a dislocation in the markets, investors were bearish (i.e., bull signal) and great values were to be had. This was the time to be bullish. I can understand the buying back in early July, 2009. This was likely due to short covering as traders expecting and positioned for the markets to rollover threw in the towel giving the markets much needed fuel to move higher. And I can even understand the buying now. The markets are in a strong up trend.
But to attach any significance to the market's current strength is wrong. It is just the same old story of fear and greed. The difference between March and now is that the party is getting very crowded, and when the punch bowl is taken away, most investors will have a difficult time finding the exits. Anecdotal evidence would suggest this is particularly so in a market driven by notions of "liquidity"; sell offs can be rather brisk.
None of this is to suggest that I see a sell off in the near future, but from this perspective, risk is rising. As I have been stating for several months now, there is an upward bias until the extremes in bullish sentiment are unwound. Shorting the major indices beyond 1 hour seems to be a difficult notion in this market.
The "Dumb Money" indicator is shown in figure 1. The "Dumb Money" indicator looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investor Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio. The "dumb money" remains extremely bullish.
Figure 1. "Dumb Money" Indicator/ weekly
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The "Smart Money" indicator is shown in figure 2. The "smart money" indicator is a composite of the following data: 1) public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders. The "smart money" is neutral.
Figure 2. "Smart Money" Indicator/ weekly
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Company insiders have resumed selling of their shares to an extreme degree. See figure 3, a weekly chart of the S&P500 with the INSIDERSCORE "entire market" value in the lower panel.
Figure 3. InsiderScore Entire Market/ weekly
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Figure 4 is a daily chart of the S&P500 with the amount of assets in the Rydexbullish and leveraged funds versus the amount of assets in the leveraged and bearish funds. Not only do we get to see what direction these market timers think the market will go, but we also get to see how much conviction (i.e., leverage) they have in their beliefs. Typically, we want to bet against theRydex market timer even though they only represent a small sample of the overall market. As of Friday's close, the assets in the bullish and leveraged funds were greater than the bearish and leveraged; referring to figure 4, this would put the green line greater than red line.
Figure 4. Rydex Bullish and Leveraged v. Bearish and Leveraged/ daily
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Most big investors are underperforming their benchmarks and are now forced to chase equities higher. That is why you are seeing rotation into high beta stocks and cyclical stocks. You can easily go parabolic from here so be careful shorting this market. Also, there is no catalyst for systemic risk...yet.
Leo:
I was very careful in saying not to short; to short this market requires knowledge of the future that the market is going lower for more than hour. This doesn't make it a rip roaring buy either as I believe risk is high because of the overbought, overvalued, oversubscribed liquidity driven market can fall rather fast - just predicting that exact point is difficult right now.
You state that big investors are forced to chase junk stocks higher....is there evidence of such or is this just dogma for the persistence of this price move?
Tech-Take. You consistently offer the most sensible, and clearly stated perspective of all the contributors. Thanks
Dr. Manure...from one newnut to another...As far as I can tell, the contributors to ZH are an extremely intelligent bunch, showing a large capacity for critical and other types of thinking. As one moves down the comments on a post, there seems to be a rough hierarchy in place (in order of decending coherence):
Professional traders- seem very smart, prefer to communicate in acronyms
freaked out short sellers
semi-pro traders
self-righteous, frustrated, bears-these people are going to be pissed if the us economy doesn't completely collapse this year
newnuts-I thought about putting this higher, but modesty prevailed
goldbugs
ammo and liquor stockpiling proto-survilists
garden variety, anti-fed, tinfoil hat wearers
run of the mill trolls, with semi-racist leanings
one of kind ranters colorful online personas (i.e chumbawumba)
just sayin'
a bit sarcastic, these folks. masters of understatement. best read going.
USD index showing bullish divergence once again, on daily chart.
MORE:
http://www.zerohedge.com/forum/market-outlook
I am a perma-bear and have gone from a 30long-70short portfolio to 50-50. Short your hearts out !!
To make up for loss of GDP, Stiglitz & Sarkozy propose adding "happiness factors" into the numbers including access to healthcare, well being and leisure time.
http://charts.dacharts.net/2009-09-20/TOC_2_1.png
I detect desparation of world leaders as they come up with ideas like this. Are they leaders or lunatics?
Yes, under that kind of system the unemployed (with all their "leisure time") can make a massive contribution to GDP.
The business cycle will finally have been repealed! Genius!
From cumber.com. I believe it applies to current market conditions nicely:
""The 99th edition of Pears Cyclopaedia (1990-1, pp. G27, G31) restated Goodhart’s Law as follows: “As soon as the government attempts to regulate any particular set of financial assets, these become unreliable as indicators of economic trends.” The converse could be stated as, once markets succumb to Goodhart’s warning of this unreliability, classic standards of value will prevail again.""
Substitute "manipulate" for "regulate." I had additional comments but they were lost during the outage. Suffice to say, the regular tech analysis "suspects" aren't going to apply in the current stock market.
Sounds semi-neutral. Thanks for the enlightenment.
I used to be 46 years old, do I count? Oh wait, this might be sarcasm again.
I'm a Newnut, recently transferred to this asylum. I'll sit quietly by and try to figure out what you geniuses are saying.
No need to ever explain anything to us Newnuts.
That's funny.
Thanks TTT.
TTT-
Have you ever heard of a correlation between stock prices and the number of 46 yr old men in the country? If so, is there any credence to it?
Haven't read anything that specific. For what it's worth, there is a generational age dimension to bulls and bears. When the number of middle-age investors spikes they generate a secular bull. The middle-aged baby boomers produced the current bull. As the children of boomers approach middle-age the next secular bull probably commences. 2020?
How about the inverse correlation between casinos and
wall Street?
Whenever someone uses our Blue Sky phrase last week,
I sit up and notice.
After all Mendel not the only one to figure out
inheritance about the same time.
There were a few of us bulls in March, and a few of us
bears in September.
We are getting a lot of emails from skeptics, perhaps
proving the point no mind more closed than one
fully invested at the top:
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3251493
Do you mean "The Great Bust Ahead" by Daniel A. Arnold? I read it and found it thought-provoking. I think he has a subscription service, but I did not subscribe.