Risk is no longer priced into anything. Volatility has gone to sleep. Uniformity of thought has taken over the stock market. Complacency has reached a point where even central banks have begun to worry about it: the idea that markets can only go up – once entrenched, which it is – leads to financial instability because no one is prepared when that theory suddenly snaps. But all this bullishness, this complacency is only skin deep. Beneath the layer of the largest stocks, volatility has taken over ruthlessly, the market is in turmoil, people are dumping stocks wholesale, and dreams and hopes are drowning in red ink.
It’s hard to "fully commit" to this rally given "corroded internals," warns FBN Securities technical analyst JC O’Hara in note. As we previously noted, new highs are extremely negatively divergent from the index strength, as are smarket money flows, but what has O'Hara "very disturbed" is the fact that the average Russell 2000 stock is over 22% below its 52-week highs. As O'Hara notes, investors are ignoring "technical signals that have historically forewarned" of a drop; they’re "jumping onto a plane where only one of the two engines is working. The plane does not necessarily have to crash but the risk of an accident is much higher when the plane is not firing on all cylinders."
The markets are not recognizing the clear signals that things are changing behind the scenes. This is precisley how 2007 lead to 2008.
June is seasonally a poor month for gold and technical damage means gold could be manipulated lower again before half year end ... As one astute commentator said on Twitter this week, being able to acquire cheaper gold given the state of the world today is "like being given discounts on life-rafts on the Titanic ... "
At the beginning of the year, all - as in all - of the smart money expected a rising yield environment and a recovering economy. They were all wrong. Oddly enough, they still believe pretty much the same, using seasonal scapegoats to explain away their mistakes. As for what the most selective subset of the smart money believes, here is Goldman's David Kostin with the summary: "Almost all clients have the same outlook: 3% economic growth, rising earnings, rising bond yields, and a rising equity market." Goldman's own view doesn't stray much: "Our S&P 500 targets of 1900/2100/2200 for end-2014/2015/2016 are slightly more conservative but generally in line with consensus views." And of course, when everyone expects the same, the opposite happens... even if this is one of those financial cliches we wrote about yesterday.
If clichés reflect overly common (if therefore unappreciated) wisdom, then we finally have a good explanation for why risk assets continue to rally. No, there are actually not “More buyers than sellers” – money flows are negative over the last month for both U.S. equity mutual funds and ETFs. And forget about investors “Downgrading on valuation” as stocks climb higher and higher; truth be told, that’s not even really a thing (unless you work on the sell side). Nope, this is a “Flight to quality”, “don’t fight the Fed”, “never short a dull market” environment with “easy comps” from a long rough winter. Want to call a top somewhere around here? Remember that “Markets discount events 6 months in the future.” A “Santa Claus rally” in June? That would fit the one cliché we know is actually the market’s True North: it will do exactly what hurts the most “Smart” investors. And that would be to rally further as the doomsayers double down and the timid cling to their bonds and cash.
Bad breadth, flaccid flow, and bonds bid - what could possibly go wrong?
Large speculators (read - hedge funds or the supposed "smart money") have shifted their S&P 500 positioning to net short, increased their Russell 2000 short positioning and decreased their NASDAQ longs to one-year lows. Market-neutral funds have dropped exposure notably in the last week and long/short funds are well below market norms for their long positioning. But what has the bond bears really scratching their heads (as they added to their shorts in the last week) is that the last time so many people were convinced that rates can only go higher (based on CFTC data), bad things happened in stocks.
The big question remains: will the current signal be a sign of complacency, which suggests that lower prices are ahead or will the current signal be a failed signal leading to significant market gains?
Recent developments indicate that North Korea is very quietly beginning to expand its commercial interests. Some of this is due to internal change, but it would seem that much larger geopolitical forces are at work.
There is no edge.
Francine Lacqua (Interviewer): Jim, you also have this new book out, right, saying "The Death of Money" and this basically argues that if a number of things come together, we could have financial warfare, deflation, hyperinflation, market collapse. And yet the markets are merrily going along. Are we in a fictitious world?
As if the question actually needs to be asked, we thought the following 3 charts would provide at least some defense against the constant barrage of "healthy rotation" bullshit currently being used to maintain assets-under-management as professionals unwind their levered longs into a newly-willing retail public. As Gavekal notes, the following chart show that the median stock is trading at valuation levels only seen at the previous stock market highs of 2007 and 2000.
Confirming and continuing a trend we first described a year ago, overnight RealtyTrac reported, as part of its Q1 institutional investor and cash sales report, that the percentage of all-cash buyers has soared in the past year with "42.7% of all U.S. residential property sales in the first quarter were all-cash purchases, up from 37.8% in the previous quarter and up from 19.1% in the first quarter of 2013 to the highest level since RealtyTrac began tracking all-cash purchases in the first quarter of 2011."
From 110 slides of Ackman-inspired Fannie Mae bullishness to Tudor-Jones "Central Bank Viagra", and from Jim Grant's "Buy Gazprom because it's the worst-managed company in the world" to Jeff Gundlach's housing recovery bearishness and "never seeing 1.5 million home starts ever again"... there was a little here for every bull, dick, and harry at the Ira Sohn conference. Perhaps noted behavioral psychologist said its best though: "be careful about the quality of advice you get."