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Conspicuous Contrarians, Higher Highs, And Complete Complacency
Submitted by Lance Roberts of Street Talk Live blog,
Howard Marks once wrote:
“Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that “being too far ahead of your time is indistinguishable from being wrong.”)
Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian."
It is from this viewpoint within which I most often find myself being at odds with the mainstream journalists, economists and analysts. I prefer to look at the data as "it is" rather than as "I hope it will be," for in the long run, it is reality that will win out over fantasy. This was the premise from which I recently wrote "Evaluating 3 Bullish Arguments" wherein I analyzed three of the most common fundamental arguments used to support "bullish outlooks." Those arguments all failed under real scrutiny.
While the average "saver" chases the stock market, salivating at every tick higher, what they often fail to recognize is the mounting risks that will eventually lead to larger than expected losses of investment capital. History is replete with evidence that shows that the longer an up cycle lasts the larger the losses are when it contracts. It ALWAYS contracts eventually. Individuals, despite the television commercials that promote the latest do-it-yourself trading platforms, are not capable of navigating the financial markets over a full cycle.
It is important to understand that I am not "bullish" or "bearish." I have no bias towards the markets other than participating when it is rising and protecting client capital when it isn't. However, I am often given the moniker of a "bear" because I choose to point out the risks to investment capital rather than joining in with the lemmings all merrily marching towards to their eventual demise. My job, as a portfolio manager, is to navigate the markets for the "full cycle" - both the up cycle as well as the down. While the media chastises individuals for not chasing the market to the upside - I have never met an individual yet that was happy with matching market performance during a 20% decline. Losses of investment capital hurt individuals far more than missed opportunities. Lost capital is also far more difficult to recoup.
However, while I have spilt much ink lately pointing out the risks to investors ahead (see here, here and here), it is important that you realize that our portfolio models remain fully invested and that I have been correct in my assessments of the current market trends. Back in February, which now seems like a lifetime ago, I penned an article entitled "Get Ready For The Run To All-Time Highs" in which we discussed the reasons why the stock market would likely push to all-time nominal highs. At that time I stated:
"The bullish trend is supported, at the moment, by excessive bullish optimism and $85 billion a month in liquidity. Market participants, like a marathon runner, are so amped up on endorphins that they lose awareness of their surroundings. Right now, investors see the finish line just ahead as CNBC flashes banners on their screen with countdowns of points to reach a new all-time high.
However, it is important as investors, that we do not simply dismiss the dangers that continue to build in the economy and the markets. To simply assume that there are no excesses being created in various asset classes is short sighted. Asset "bubbles" are never recognized, or acknowledged, until after the fact. Currently the increases being witnessed are primarily due to the inflows of liquidity which is masking the deterioration of fundamental underpinnings. That is an unsustainable trend in the longer term, but, in the short term there is nothing inhibiting further increases as long as complacency remains high."
That analysis, some 160 S&P 500 points later, remains salient. While the risks are definitely mounting (record margin debt levels, low "junk bond" yields, markets at extreme deviations from long term moving averages) there are several reasons why stocks could continue to climb higher in the near term.
The Fed's Liquidity Pump
The most obvious driver of stocks currently is the Federal Reserve's ongoing balance sheet expansion program which pushes liquidity directly into the financial markets. As the chart shows below there is an extremely high correlation, since 2009, between the expansion of the Fed balance sheet and the financial markets.
As long as the Federal Reserve remains committed to its "accommodative strategies" the markets are likely to remain buoyant against weaker fundamental and economic underpinnings. This driver, by all counts, is the sole driver of higher asset prices currently and in the near future.
Complete Complacency
I stated recently that the "lack of fear is what we should fear the most." When investors are the most complacent that is when bad things tend to occur in the financial markets. However, complacency is also a tailwind for stocks as long as there are no exogenous shocks to change the course of the flow of money.
The chart below is the STA Risk Ratio which is a composite index of various sentiment indicators such as the volatility index, AAII bull/bear ratio, Institutional Investor bull/bear ratio, NYSE high/low ratio and others. When this index is rising, as it is currently, markets are on the rise as well. While this index is near historical peaks there is current no "event risk" present, that we are aware of, at the moment to send investors scurrying for cover.
This complete lack of fear, combined with the belief that as long as the Fed is in play there is no downside risk to owning stocks, makes it is very possible for stocks to continue upward trajectory within the context of the current bullish trend. As we will discuss below, there is currently no overhead resistance for stocks from a historical perspective.
Bullish Trend
The laws of physics state that an object in motion will remain in motion until it meets resistance. That is currently the dynamic of the markets. With the breakout of the bullish uptrend, combined with the break of long term overhead resistance, there is nothing to stop asset prices from rising further until the next major correction occurs.
I have drawn three important lines in the chart above. The break of overhead resistance will now become the first level of support for the markets on any correction. If the markets do correct, and find support at 1600 while simulatenously working off the much overbought condition in the process, then the market could rally higher from this level. This same idea goes for the previous two upward trending bullish support lines. However, if the market breaks below 1400 then a different dynamic comes into play. The current bullish cycle will end and a bear market investment strategy will need to be put into play.
However, currently, there is little to stop asset prices from rising higher technically as long as:
1) The Fed remains engaged in their current liquidity programs.
2) Economic and fundamental "bad news" remains "good news" for the markets as it keeps the Federal Reserve in play.
3) The other major Central Banks remain engaged in their liquidity programs.
4) No exogenous events spring up such as a resurgence of the Eurozone crisis.
5) Interest rates remain contained below 2.5%
Risks Remain
While stocks could continue to climb higher that does not mitigate the underlying risks. In fact, it is quite the opposite. It is very likely that we are creating one, or more, asset bubbles once again. However, what is missing currently is the catalyst to spark the next major correction.
That catalyst is likely something that we are not even aware of at the moment. It could be a resurgence of the Eurocrisis, a banking crisis or Japan's grand experiment backfiring. It could also be the upcoming debt ceiling debate, more government spending cuts, or higher tax rates. It could even be just the onset of an economic business cycle recession from the continued drags out of Europe and now the emerging market countries.
Regardless, at some point, and it is only a function of time, reality and fantasy will collide. The reversion of the current extremes will happen devastatingly fast. When this occurs the media will question how such a thing could of happened? Questions will be asked why no one saw it coming. Fingers will be pointed and blame will be laid. While I am absolutely certain this will happen - I just don't know when. It could be later this year or even next year. Timing is always the problem and as Howard Marks stated - being early, even if you are right, is the same as being wrong.
This is why it is more important than ever that you remain aware of the risks and pay attention to exposure that you take on within your portfolio. I point out to you the risks that we are watching, the detail behind the headlines and historical precedents that have led to massive losses of investor capital in the past, so that you can take appropriate risk management actions in your portfolio. There is no prize for beating the market from one year to the next, however, there are severe penalties when things don't go as planned.
Enjoy the ride - just don't forget that our job as investors is to "sell high" so that we can "buy low." This is the one simple rule that is always overlooked by the media, analysts and economists who are chiding you to chase extremely overbought, over extended and excessively bullish markets.
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Next time just throw the I-Ching and read us what it says.
I have a crystal ball and a mood ring. Let me give it a try
but you're missing the glasses with the holographic eyes so you'll probably miss the call
Or you can be part of the much needed voice in reforming govt, markets, & ending the fed instead of worrying about nominal/fiat movements that won't procure any real wealth in the end.
Related to 'end the Fed' ...
Here in Europe a mass of protesters have been advancing on euro-zone central bank headquarters in Frankfurt
Blockupy the ECB !
2nd day on Saturday ... a major Central Bank going under populist street blockade, is an issue deserving ZeroHedge coverage
Maybe Tyler doesn't like our protest, because the protest is against the 'austerity' that Tyler likes to pretend isn't happening in Europe, because ZH uses a different definition of it (Tyler likes to pretend 'austerity' means less government budget overall, whereas in Europe we view 'austerity' as cuts ravaging common people while banksters get bailouts piled onto existing debt)
« Thousands of anti-austerity protesters have flooded the streets leading to the European Central Bank in Frankfurt in a so-called ‘Blockupy’ protest. They are demonstrating the bank’s role in enforcing crippling spending cuts across the Eurozone. »
http://rt.com/news/frankfurt-banks-updates-live-048/
thanks BGB
Could have happened, not could of happened.
Buy Blow Sell High........ I thought that was the new investor mantra
Fed's "liquidity pump" turned out to be the Fed's "liquidity dump." http://www.youtube.com/watch?v=g_wc9JvTXGc we're suppose to know these things of course...but somehow we never do.
The volatility in JGBs has led to massive margin calls on OTC derivatives and repos, causing liquidations as hedgies and Japanese banks scramble for cash (70 per cent OTC margin is still cash). Also, CME raised margins on JGB futures and options by 38 per cent this week. What we are seeing is rolling liquidations as volatility leads to margin calls leads to liquidation leads to volatility leads to margin calls . . . etc.
When the dollar rises, watch out below.
Ben has a plan /s
A lot of words to say absolutely nothing of value. QE is like everything else. It works until it doesn't. What increased liquidity??? The FED prints money, gives it to the banks and there it stays. Amongst those who slosh it around back and forth until ultimately like in 2008, what we don't see becomes what should still be apparent. The game is the same except it now being played on air.
Jobs suck
wages suck
manufacturing sucks
A whole segment of the population is no longer statistically relevant. It no longer exists. It is no longer counted and has been removed from the equation. This is a segment of the population that was at one time productive, consumptive and part of the tax base. It is gone. Any current data is skewed by their loss and can not substatiate growth where no growth is occuring so profits can not support price.
People still destroyed from debt are further in debt. And the banks are perfectly happy keeping it that way. Where is the profit for them in messing around with a population that can return them little.
We shipped our jobs overseas to China, China now ships jobs to other asian countries and now some jobs trickle back home to lower wages, lower hours worked, fewer benefits, higher costs Japan engages in what amounts to nothing and the money chases it's tail.
We posted long ago that the US was subsidizing Europe during the "bailouts"/failing to hold accountable. What is the value of those dollars now? Where are they?
There is no economy in the traditional sense of the word. What you have now is pockets of super wealth trying to crush each other at our expense. Every dollar printed and given to a bank, corporation, is a dollar taken out of the economy not added to.
The statistical poor will be kept fed until they too become statistically irrelevant and fall from sight to eek out an existense in tunnels, under overpasses, in caves dug in hillsides where they will be hounded by the gestapo to move on. Become less visible.
For most the money in the markets is meaningless. Whats a 150,000.00 in an ira relative to........
Bernanke does not see that, he is blinded by the arrogance we allow him. Most in government do not see that, they are blinded by the cash waved in front of their faces by those who own them. Most who remain on main street do not see that, they are to worried about keeping what they have and fuck their childrens future.. All are convinced that their way works until it doesn't and the proof will be history repeating itself over and over again.
Money can not inflate if it does not exist for so many, in any significant amount, it does not exist. It is only 1's and 0's on a banks computer.
For the most part people are good. So they will not rise up against the greed of the evil. They will keep there heads down increasingly desensitized to the futility of their existence. They will learn to say "massa". Because the law will apply to them while it no longer applies to the corrupt.
Yesterday, knowing today was a big pomo day I went longer TVIX and DTO. Because one thing man can not control is gravity.
" Asset "bubbles" are never recognized, or acknowledged, until after the fact."
They are not recognized or acknowledged by those who want to ignore the inconvenient truth. When Greenspan said irrational exuberance he was talking bubble. When Greenspan was talking frothy, he was talking bubble, without acknowledging it.
"(Tyler likes to pretend 'austerity' means less government budget overall, whereas in Europe we view 'austerity' as cuts ravaging common people while banksters get bailouts piled onto existing debt)"
Austerity is living within your means. Is Europe living within its means? Bailouts are not austerity. The term austerity is being misused by those who throw the term around.
The date for various countries to get to 3% deficits keeps being extended. A deficit is not austerity. A deficit is not living within ones means.
"With the breakout of the bullish uptrend, combined with the break of long term overhead resistance, there is nothing to stop asset prices from rising further until the next major correction occurs."
At 666 there was nothing to stop asset prices from rising further until the mext major correction.
The thing about parabolics is that they collapse. APPL never made it to 1,000, even though there was nothing preventing it from doing so.