From Equity "Love" To Market Hate?

Tyler Durden's picture

While the market itself has exhibited the exuberance we have all seen before (and never seem capable of learning from), BNP has quantified this love-panic relationship (and the news is not great for the bulls). When in 'love' mode, the average drop in stocks has been 12% in the next six months. The biggest drivers of this "love" have been investor confidence, CoT positioning, short-interest, relative trading volumes, and sectoral outperformance with fund-flows shifting away from "love" suggesting the short-term top is in. The index itself peaked a week or two back at levels of "love' not seen since pre-Lehman; not a good sign.

 

BNP explains their framework:

In our Love Panic model, we try to identify distress and euphoria in an attempt to predict forward market returns. In order to successfully predict the market we have chosen parameters with good predictive capabilities during different market cycles but also those that make qualitative sense.

 

 

 

Investment should be dispassionate but not automatic. Some investors solve this problem by hiring a mechanic (or quant) to build a machine to invest on their behalf. This indicator is not for them. Instead, this indicator highlights when market sentiment is either overly depressed or excessively optimistic. This helps one at least adjust for ones mood.

 

So we suggest that when the market has reached a level of distress, it’s a good time to buy. Meanwhile, when investors are euphoric,we advocate a sell. As a result we have developed a contrarian indicator model. When our signal is in panic (negative), it indicates a buy. While when the signal reads positive it’s a sell signal.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
mayhem_korner's picture

In order to successfully predict the market we have chosen parameters with good predictive capabilities

 

Apart from scheduled open market purchases by the Fed, what other "parameters with good predictive capabilities" are left?

GetZeeGold's picture

 

 

Hold on......I'm thinking.

timbo_em's picture

USDJPY (very short-term, of course)

The phrase you quoted made me go hmmm, too.

fonzannoon's picture

when you are in a ponzi, and you know it's a ponzi, your only option is to sucker more people into it.

mayhem_korner's picture

 

 

Cool.  Where do I sign up?

Its Only Rock N Roll's picture

reminds me of Minsky's paper "The Financial Instability Hypothesis":

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=161024

its a short read (if you haven't read it yet) ...well worth it IMO

RSloane's picture

So essentially what the author is saying is that the markets have the emotional structure of a fifteen year old. No offense intended to fifteen year olds.

fonzannoon's picture

You read it? What was it about? The title implied some sort of negativity towards equities, so I moved on.

RSloane's picture

They are talking about shifting market moods and predictors of market performance based on those. They also look at cyclical patterns in attempts to again predict where the market will generally be going, ie, the love-panic model.

 

And good morning to you Fonz!

fonzannoon's picture

Good morning to you as well. Last night Kito said when I woke up this am the dow would be green. The man is a prophet. A prophet I tell you.

buzzsaw99's picture

Participate in our capitalist free market comrade!

Cdad's picture

Having a twitter exchange with a PM suggesting portfolio rotation to the Russell...'cause it's cyclical.  

Someone explain to me how three years of QE, with its effects flowing to large cap companies, is now supposed to translate into a booming small cap world?  What Ben Bernake has done is give all of the biggest, deadest, most corrupt crony corporations an enormous lead, and as we have seen via jobs reports...small business has been crushed.  

Russell 2K stock bidders represent the kings of capital misallocation.  Small cap companies need an actual economy, don't you know.

So let the love transition to hate...

HelluvaEngineer's picture

Nah, they don't need any actual revenue. They just need to be heavily shorted, then all the "investors" can shower them with all that hot QE lovin'.

Actual sales? Overrated IMO

Cdad's picture

Brother Engineer....how about those REITs?

Do not underestimate the power of capital misallocation.

SheepDog-One's picture

The banks have been refilled with fiat, any day now they'll pull the rug out on equities and mom and pops. They don't give a flyin shit at a rolling donut about anyone but the banking overlords. 

scatterbrains's picture

Speaking of love.. it seems lately that every morning in the light pre market hours, the fed (if she were a woman) spreads her legs (buys /es and sells gold) offering anyone who chooses to *hit it*  (fresh money to buy discounted pm's)

thanks BB

Cdad's picture

I have been ever patient on the silver/gold trade.  One might say...too patient considering the silver price action of about two weeks ago.

It is on my radar now...just looking for an open or close with sufficient "banging" to make my transition.

Racer's picture

"those that make qualitative sense"

Now who in their right mind would use that as an indicator in this 'market'

adr's picture

They can't switch to hate yet, the bag holders haven't arrived yet. It doesn't look like they ever will.

The bag holders are all running around trying to flip homes, seeing it easier to make profit off flipping property to hedge funds instead of buying stocks. Stocks seem complicated to most people pulling in a $80k pension. Taking $60k to buy a forclosure and flipping it to Blackrock for $80k seems simple.

Imagine if the value of your home acted like Netflix or Amazon.

Hey, we had 20 people look at the house, those eyeballs are good for a 900x price to reality ratio. Although a true valuation puts the price at $200k, the views of the house tell of a value closer to $10 million.

Or, yes the house is empty and has no walls, plumbing, electrical, or heating. In essence an empty shell. BUT THINK OF THE POSSIBILITIES. You are free to grow the home into anything you want. This possibility is worth 500x the value of a complete house. Not only is it the buy of a lifetime, you'd be an absolute moron to not buy it.

Oh shit, someone offered a bid of $150k for that home valued at $250k, SELL, SELL SELL.

MeelionDollerBogus's picture

and let's not forget... storage lockers! peak junk on the way...

BullyBearish's picture

Same people who send young innocents to die are the same ones who dribble it out to you over a lifetime but take back very large chunks at their pleasure.

Blopper's picture

Love-hate index my ass.

Where is the backtesting result?

Chief Falling Knife's picture

When in 'love' mode, the average drop in stocks has been 12% in the next six months.

I think at this point the bulls would scoff at a 12% correction.  Considering the Dow is up over 18% so far this year, while the S&P is up over 17% YTD. 

TWSceptic's picture

This should bring more clarity about where we are: http://www.offtopic.nl/img/dow2013vsbubble.png

 

A second sell off is certainly possible, and would be seen as 'healthy' by the bulls at this point.

Chief Falling Knife's picture

I like that chart comparison.  Though it could be argued that 2010 was the 'first sell off' which would mean we are overdue for the 'pop'.