A "Frothy", "Overbullish", "Overbought", "Overmargined" Market With "Not Enough Bears" - In Charts

Tyler Durden's picture

Last week, Bank of America warned that "it's getting frothy, man" based on the sheer surge of fund flows into equities. Here is the same firm with some other observations on what can simply be described as a "frothy", "overbought", "overmargined" market with "not enough bears."

From Bank of America:

"Daily slow stochastic is generating an overbought sell signal."

"Based on the American Association of Individual Investors (AAII) Bulls to Bears ratio investors are more bullish now than they were in late May and mid July. In terms of sentiment, this is a contrarian bearish condition. Since April, near-term peaks and troughs in AAII Bull/Bears have coincided w ith near-term market peaks and troughs."

 

Bears drops to 16.5% = too few bears;  As of October 25, Investors Intelligence (II) % Bears extended deeper into contrarian bearish territory below the 20% level with a reading of 16.5%. This is down from 18.5% the prior week and the lowest level for II % Bears since April 2011 – this suggests too few bears among new sletter writers. II % Sentiment is an equity market risk and confirms the complacent readings for the 5-day put/call ratios.

NYSE margin debt at record high; confirms S&P 500 high; As of September 2013 NYSE margin debt stood at a new record high of $401.2b and exceeded the prior high from April of $384.4b. This confirms the new S&P 500 highs and negates the bearish 2013 set up that was similar to the bearish patterns seen at the prior highs from 2000 and 2007, where a peak in margin debt preceded important S&P 500 peaks.

Risk: Net free credit at $-111b & back at 2000 extremes; Net free credit is f ree credit balances in cash and margin accounts net of the debit balance in margin accounts. At $-111b, this measure of cash to meet margin calls is at an extreme low or negative reading not seen since the February 2000 low of $-129b. The risk is if the market drops and triggers margin calls, investors do not have cash and would be forced to sell stocks to meet the margin calls. This would exacerbate an equity market sell-off.

Then again, do any of these technicals matter? Of course not: only the size of the Fed's balance sheet does.