This page has been archived and commenting is disabled.

Peak Speculation And The Ides Of January 14th

Tyler Durden's picture


Confidence abounds. Last week, Investor’s Intelligence reported a surge in advisory sentiment to the highest bullish percentage since October 19, 2007. John Hussman notes that NAAIM reported that the 3-week average equity exposure among its members increased to the highest level on record. Given the unfortunate resolution of similarly extreme overvalued, overbought, overbullish, rising-yield periods in history, it's almost mind-boggling that investors actually expect the present speculative run to end well. The accelerating pitch and shallowing corrections of the recent advance are worth noting.

Via John Hussman,

Based on the fidelity of the recent advance to this price structure, we estimate the “finite-time singularity” of the present log-periodic bubble to occur (or to have occurred) somewhere between December 31, 2013 and January 13, 2014. That does not mean that prices must immediately crash – only that the dynamics will then lend themselves to a great deal of potential instability, if prior log-periodic bubbles in equity and commodity markets across history are any indication. It bears repeating that our own defensiveness is driven by a broad ensemble of evidence, not simply price dynamics, not simply valuations, not simply sentiment, but the “full catastrophe” – which includes the fact that strong economic, speculative and monetary enthusiasm has historically been quite a contrary indicator for stocks.

The chart below shows the current position of the S&P 500. The light red line shows the log-periodic price trajectory that most closely approximates the present overvalued, overbought, overbullish, Fed-induced speculative run since 2010. While the initial gains from the 2009 low until about mid-2010 represented what we view as a move from reasonable valuation to full valuation (our stress-testing “miss” was not on valuation grounds), I expect little, if any of the market’s gains since 2010 to be retained by investors over the completion of this market cycle. Despite very short-run uncertainties about market direction, I should note that we now estimate negative prospective total returns for the S&P 500 on every horizon of less than 7 years.


And this is what Hussman said in 2007...

“Wall Street remains exuberant about economic prospects. Last week brought a 6-year high in consumer confidence, evidently supporting the idea that the consumer remains strong and the economic expansion remains intact. Unfortunately, if you examine the data, you'll quickly discover that consumer confidence is a lagging indicator, well explained by past movements in GDP, employment, and capacity utilization. Worse, for the stock market, it's a contrary indicator.


This is a fact that I've noted at both extremes, not only in early 2000 when new highs in consumer confidence supported a defensive position, but conversely in the early 1990's, when new lows in consumer confidence supported a leveraged position in stocks. High levels of economic optimism are regularly observed at the peaks of both U.S. and foreign economic expansions.


This includes the general consensus of individuals, businesses, politicians, central bank officials and notoriously – economists. That shouldn't be surprising. It's the very nature of a peak that it can't be produced except by unusual optimism.”


Hussman Weekly Market Comment, 08/06/07 Strong Economic Optimism (… is a Contrary Indicator)

Sound familiar?


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sun, 01/05/2014 - 21:12 | Link to Comment Eireann go Brach
Eireann go Brach's picture


Sun, 01/05/2014 - 21:21 | Link to Comment Pool Shark
Pool Shark's picture



Searching for the greater fool...


[but then again, Birinyi's Ruler says S&P @ 28,000 by July...]




Sun, 01/05/2014 - 21:27 | Link to Comment Soul Glow
Soul Glow's picture

Stocks worldwide will fall 10% - 20% in the coming months and gold will break $1300 before the end of January.

Sun, 01/05/2014 - 21:19 | Link to Comment He_Who Carried ...
He_Who Carried The Sun's picture

A turnaround story in its early steps...


Sun, 01/05/2014 - 21:17 | Link to Comment beaker
beaker's picture

To All Bulls: Put your fucking stops in.  Don't even think about it.

Sun, 01/05/2014 - 21:23 | Link to Comment FieldingMellish
FieldingMellish's picture

Stops don't work in a zero bid market. Bots can create zero bid markets in microseconds. Far better to sell into strength than to risk not getting out on unprecedented weakness.

Sun, 01/05/2014 - 21:55 | Link to Comment kliguy38
kliguy38's picture

there are probably not a handful bulls that have a clue how bad this pig can dump on them............but they will.....and of course they'll be the loudest crying foul and no one warned them...........wash rinse repeat

Mon, 01/06/2014 - 03:37 | Link to Comment OutLookingIn
OutLookingIn's picture

It will happen on a Friday.

Those on the inside will have already exited.

Come Monday morning, the slow slide will begin.

By Thursday it will be all over but the crying. Paper rich one day - and the next? Dirt poor.

Sun, 01/05/2014 - 23:55 | Link to Comment disabledvet
disabledvet's picture

would like to know who's long bitcoin actually. what happens if Facebook drops 50% in one day? that's my problem with the S&P---it's got a massive amount of Nasdaq in that thing and that index definitely has been pushing the S&P higher not the other way around.

Mon, 01/06/2014 - 03:48 | Link to Comment vie
vie's picture

I'm long Bitcoin, but expect Bitcoin will implode with the rest of the assets as the speculators de-leverage.  On the flip side, it might be a relative safe-haven once hyper-inflation sets in.  Question is, which comes first.  If Yellen has anything to do with it, we'll inflate to the moon before we let stocks crash.

Sun, 01/05/2014 - 21:26 | Link to Comment Pool Shark
Pool Shark's picture



Maybe this is what Bernanke was thinking: Tapering won't matter once the market crashes. All the excess liquidity fleeing stocks will splash into bonds; more than making up for that paltry $10 billion/month 'taper.'...


Sun, 01/05/2014 - 21:25 | Link to Comment El Vaquero
El Vaquero's picture

I could see that happening.  Those yields must not rise, and that would be some fairly sophisticated market manipulation. 

Sun, 01/05/2014 - 21:32 | Link to Comment Soul Glow
Soul Glow's picture

Just don't tell Yellen.

Sun, 01/05/2014 - 21:40 | Link to Comment BlackChicken
BlackChicken's picture

Agreed EV, but either way it is just another bailout.

Sun, 01/05/2014 - 22:35 | Link to Comment AeroSmith
AeroSmith's picture

I said something similar to a friend a few months ago: the easiest way for the fed to stop its bond buying, indeed, even sell bonds if it were so inclined, would be to manufacture a correction in stocks.

Sun, 01/05/2014 - 22:43 | Link to Comment El Vaquero
El Vaquero's picture

Yes, but that's only temporary.  How long will the herd behavior last before yields start going back up without Fed intervention?  Not that the temporary bit would stop the Fed from pulling something like that, but without some major financial miracles, we're not getting out of this. 

Mon, 01/06/2014 - 00:02 | Link to Comment NIHILIST CIPHER

EV         Fed could bail- in to 401k's and pension plans to buy bonds, on your behalf of coarse, to help the sheep with their investing.

Mon, 01/06/2014 - 01:37 | Link to Comment El Vaquero
El Vaquero's picture

*Puts on tinfoil*

That is something that I halfway expect.  OK, maybe more than halfway expect, but I'm not certain about it.  Maybe it'll be the CFPB rather than the Fed, but that is a big cookie jar for .gov to stick its hand into.  Maybe it won't happen, I don't have a crystal ball, but it is not beyond belief.  If it does happen, I'm wondering , how many sheep will it piss off?  There are quite a few dollars in those retirement accounts, so I'm wondering how long that effect will last?  When you think about it, if they do it without causing the plebs to unleash the torches and pitchforks, it could extend things for a while longer.  If they pull it off, 2014 won't be a big crash year, barring external events. 

Mon, 01/06/2014 - 04:07 | Link to Comment Colonel Klink
Colonel Klink's picture

There was an open comment period back in 2008/2009 when CONgress was considering this very issue.

Mon, 01/06/2014 - 03:54 | Link to Comment vie
vie's picture

Unless Bernanke has some way of directing it into Bonds and not commodities... it's not going to happen.  $90,000 oz Gold anyone?

Mon, 01/06/2014 - 02:58 | Link to Comment MeelionDollerBogus
MeelionDollerBogus's picture

i can haz fomo?

vertical chart = buy before the party's over, right?


Sun, 01/05/2014 - 21:26 | Link to Comment JustObserving
JustObserving's picture

Ides (calendar), a day in the Roman calendar that marked the approximate middle of the month

The Ides Of January 14th is not quite right.  It should be ides of January if you do not mind my saying so.

Example:  The Ides of March (LatinIdus Martii or Idus Martiae) is a day on the Roman calendar that corresponds to 15 March


Sun, 01/05/2014 - 21:22 | Link to Comment J Pancreas
J Pancreas's picture

This run will end the same way others before it have ended. It'll be so obvious to most in hindsight. How ludicrous an idea the notion a central bank can indefinitely remove risk with a put. Of course right now, blinded by the gains, 'recovery', green shoots, etc. people are loving life and partying hard in the markets. Same as it ever was. The morons who will run a new Frontline special in ten years will ask, "If 48 million Americans needed help to eat, the gold vaults were being emptied, and the Fed printed a trillion a year in excess dollars to cover a debt hole, why could no one see this?"


And I'll quietly chuckle from my humble abode far from the maelstrom and thank ZH for giving me the tools I needed to succeed.

Sun, 01/05/2014 - 21:27 | Link to Comment El Vaquero
El Vaquero's picture

<---- No more dips and leads to increased Fed/banker manipulation.

<---- No more dips and leads to a sudden BIG dip.

Mon, 01/06/2014 - 04:09 | Link to Comment Colonel Klink
Colonel Klink's picture


Sun, 01/05/2014 - 22:52 | Link to Comment chump666
chump666's picture

The Fed will only be able to run this thing so far. If Asia liquidates...

Shanghai and Japan down 2% neg

You won't be rioting over pots and pans, Nikes and TVs, but food and essential items in 2014. 

Sun, 01/05/2014 - 23:00 | Link to Comment chump666
chump666's picture

In ref to Asia, that is the whole region, America's creditor. Thailand is blowing up, next will be Cambodia and Vietnam, then the China/Japan war will start:

0250 GMT [Dow Jones] The U.S. dollar strengthens to a new 4-year high of 33.12 against the baht but backs down after meeting technical resistance, as political protests in Bangkok escalate. The crisis is deepening, with protesters planning more frequent rallies and organising a large-scale occupation of undisclosed sites on Jan. 13 to disrupt the election process. The rallies and a potential shutdown of key infrastructure and services also threaten tourism.

China/Japan war drums:

"Japan is experiencing a revival of long-dormant nationalist emotions just as China is moving to translate its economic rise to military pressure across the region," he writes. "The clashing nationalistic trends feed each other." Luttwak warns that the Chinese military has a tendency to act recklessly, which could make a potential "mistake" that leads to a crisis more likely."It was different during the Cold War," he writes. "Soviet officers knew that 'adventurism' was a career-ending offense. Yet in the Chinese case, Communist Party leaders apparently encourage it."For now, both Japan and China seem to have domestic reasons for continuing bellicosity in the region. The danger, however, is that a war of words could turn into a war of more than words.

Sun, 01/05/2014 - 23:57 | Link to Comment Make_Mine_A_Double
Make_Mine_A_Double's picture

Tanks and artillery moving into BKK.

Of course this is only for Armed Forces Day parade on Jan 15.

Thai Joint Chiefs saying they want to beat the protest congestion - LOL

Mon, 01/06/2014 - 02:23 | Link to Comment StychoKiller
StychoKiller's picture

"Beat" has more than one meaning...

Mon, 01/06/2014 - 03:56 | Link to Comment vie
vie's picture

China will run this until they can't get anymore Gold out of the US.  Then they'll flip it on it's head.

While China is stocking up on Gold, the US is stocking up on energy reserves and everything else it needs to fight a war.

Sun, 01/05/2014 - 23:02 | Link to Comment jon dough
jon dough's picture

M2 (non-seasonally adjusted) is at 8.8% and continues to accelerate. This is excess reserve money hitting the market. This run still has legs.

Sun, 01/05/2014 - 23:27 | Link to Comment wisehiney
wisehiney's picture

Tony Montana just saw his banker on TV and said "You know what Capitalism is?" "Getting fucked."

Mon, 01/06/2014 - 00:03 | Link to Comment NIHILIST CIPHER

wisehiney     Tony also said he (banker) is a pig that don't fly straight.

Mon, 01/06/2014 - 00:41 | Link to Comment Seize Mars
Seize Mars's picture

..." If money isn't loosened up, this sucker could go down"

GW Bush, Poet

Mon, 01/06/2014 - 05:50 | Link to Comment blabam
blabam's picture


Mon, 01/06/2014 - 01:52 | Link to Comment q99x2
q99x2's picture

Dude during the times prior to hyper inflation stock markets soar. This one the FED has connected to an infinite supply of counterfeit money.

You haven't seen anything yet.

Mon, 01/06/2014 - 02:02 | Link to Comment smcapmachine
smcapmachine's picture

Dead wrong zerohedge article #6875.

Mon, 01/06/2014 - 07:39 | Link to Comment Sufiy
Sufiy's picture

With Bitcoin crossing $1000 mark again at Mt.Gox today we issue our Warning like we did last timeBitcoin is building a Double Top potentially and level of $1240 will be crucial. It is the great present to Chinese holders - we guess that they will be happy to sell into this strength with restrictions for FIAT withdrawals from Exchanges coming in place by end of this month.

Mon, 01/06/2014 - 08:10 | Link to Comment ebworthen
ebworthen's picture


Wow, what a float, what an epic ramp job.

Based on nothing but FED gravy slathered on Wall Street and fucking over individual citizens coming and going (crash, no return on savings not in the equity casino, healthcare, taxes, fees, % commissions).

Crime of the century, beyond the establishment of the FED itself, and the ultimate goal of establishing the FED to begin with.

Generations of normal folks robbed of assets and made to suffer for the elites.


Mon, 01/06/2014 - 12:51 | Link to Comment DrunkenMonkey
DrunkenMonkey's picture

"if prior log-periodic bubbles in equity and commodity markets across history are any indication" 


What is normal about the last five years of history ? Nothing.
I'm long until interest rates breach 3.5%.

Do NOT follow this link or you will be banned from the site!