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No One Will Ring The Bell At The Top
Submitted by Lance Roberts of STA Wealth Management,
The market has had a rough start of the year flipping between positive and negative year-to-date returns. However, despite all of the recent turmoil from an emerging markets scare, concerns over how soon the Fed will start to hike interest rates and signs of deterioration in the underlying technical foundations of the market, investors remain extremely optimistic about their investments. It is, of course, at these times that investors should start to become more cautious about the risk they undertake. Unfortunately, the "greed factor," combined with the ever bullish Wall Street "buy and hold so I can charge you a fee" advice, often deafens the voice of common sense.
One of my favorite quotes of all time is from Howard Marks who stated:
"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."
That quote is truest at extremes as markets can remain "irrational" far longer than would otherwise seem logical. This is particularly the case when, despite clear signs of overvaluation and excess, central banks worldwide are dumping liquidity into economies in a desperate attempt to "resolve a debt bubble with more debt."
It is interesting that when you ask most people if they would bet heavily on a "pair of deuces" in a game of poker, they will quickly tell you "no." When asked why, they clearly understand that the "risk to reward" ratio is clearly not in their favor. However, when it comes to the investing the greater the risk of loss, the more they want to invest. It is a curious thing particularly when considering that the bets in poker are miniscule as compared to an individual's "life savings" in the investment game.
However, that is where we clearly find ourselves today. There was never a clearer sign of excessive bullish optimism than what is currently found within the levels of margin debt. Even as the markets sold off sharply in February, investors sharply levered up portfolios and increasing overall portfolio risk.
Even professional investors, who are supposed to be the "smart money," are currently at the highest levels of bullishness seen since 1990. (The chart below is the 4-month moving average of the net-difference between bullish and bearish sentiment.)
Franklin Roosevelt, during his first inaugural address, made one of his most famous statements:
"So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself..."
However, when it comes to the stock market it is the "lack of fear" that we should be most fearful of. Throughout human history, the emotions of "fear" and "greed" have influenced market dynamics. From soaring bull markets to crashing bear markets, tulip bubbles to the South Sea, railroads to technology; the emotions of greed, fear, panic, hope and despair have remained a constant driver of investor behavior. The chart below, which I have discussed previously, shows the investor psychology cycle overlaid against the S&P 500 and the 3-month average of net equity fund inflows by investors. The longer that an advance occurs in the market, the more complacent that investors tend to become.
Complacency is like a "warm blanket on a freezing day." No matter how badly you want something, you are likely to defer action because it will require leaving the "cozy comfort" the blanket affords you. When it comes to the markets, that complacency can be detrimental to your long term financial health. The chart below shows the 6-month average of the volatility index (VIX) which represents the level of "fear" by investors of a potential market correction.
The current levels of investor complacency are more usually associated with late stage bull markets rather than the beginning of new ones. Of course, if you think about it, this only makes sense if you refer back to the investor psychology chart above.
The point here is simple. The combined levels of bullish optimism, lack of concern about a possible market correction (don't worry the Fed has the markets back), and rising levels of leverage in markets provide the "ingredients" for a more severe market correction. However, it is important to understand that these ingredients by themselves are inert. It is because they are inert that they are quickly dismissed under the guise that "this time is different."
Like a thermite reaction, when these relatively inert ingredients are ignited by a catalyst they will burn extremely hot. Unfortunately, there is no way to know exactly what that catalyst will be or when it will occur. The problem for individuals is that they are trapped by the combustion an unable to extract themselves in time.
I recently wrote an article entitled "OMG! Not Another Comparison Chart" because there have been too many of these types of charts lately. The reason I make that distinction is that the next chart is NOT a comparison for the purposes of stating this market is like a previous one. Rather, it is an analysis of what a market topping pattern looks like.
As you can see, during the initial phases of a topping process complacency as shown by the 3-month volatility index at the bottom remains low. As the markets rise, investor confidence builds leading to a "willful" blindness of the inherent risks. This confidence remains during the topping process which can take months to complete. With individuals focused on the extremely short term market movements (the tree) they miss the fact that the forest is on fire around them. However, as shown, by the time investors realize the markets have broken it is generally too late.
As Seth Klarman recently wrote:
"The survivors pledged to themselves that they would forever be more careful, less greedy, less short-term oriented.
But here we are again, mired in a euphoric environment in which some securities have risen in price beyond all reason, where leverage is returning to rainy markets and asset classes, and where caution seems radical and risk-taking the prudent course. Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs.
Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared."
It is in that statement that we find the unfortunate truth. Individuals are once again told that this time will be different. Anyone who dares speak against the clergy of bullishness is immediately chastised for heresy. Yet, in the end, no one will ring the bell at the top and ask everyone to please exit the building in an orderly fashion. Rather, it will be "Constanza moment" as the adults (professionals) trample the children (retail) to flee the building in a moment of panic.
It is only then that anyone will ask the question of "why?" Why didn't anyone warn me? Why did this happen? Why didn't we see it coming? Why didn't someone do something about it?
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Ding, ding, ding...
Ding dong, ying yuan double ruble, the wicked dollar is dead...
https://www.youtube.com/watch?v=PHQLQ1Rc_Js
You are wrong if you think that China and Russia cutting a CAPEX deal for a region of Russia responsible for 3% of oil and gas production is a game changer...
funny how frank baum's 1939 book is related to the destruction of value in america today. coincidence?
http://www.thepowerhour.com/news4/wizard_of_oz_what_it_means.htm
AooooGA AooooGA.....DIVE DIVE
...
The Top"? When will we see that, maybe 2019? Look at interest rates. With rates so low, investors have nowhere to put there money except in stocks. Once rates start meaningfully rising, I might start thinking about a top. Despite the Fed's posturing the past couple of months, there's no way the Fed funds rate rises any time in 2015 and I fully expect more stimulus in 2014, whether it come from the EU, China or the Fed.
I think Goldman's actions say you are wrong.
Lions and tigers and bears ... they're going to eat you up and spit you out.
Me thinks I smell something rotten. A planned reset?
I just went short credit suisse, and I feel really good about it.
" Look at interest rates."
"Reuters is reporting that Greece has received no less than €11bnworth of bids for its new five-year bonds -- much more than the €2bn it was initially expected to sell.
Strong demand, which explains why analysts are suggesting that the bonds could be sold at an interest rate of just 5% - as Athens can cherry-pick the best offers."
http://www.theguardian.com/business/blog/2014/apr/09/greece-general-stri...
Time to stop worrying about the NWO. It's here. Global slavery 2.0 has arrived and the grandest experiment in the history of the financial system can now hold up it's "mission accomplished" sign.
There are plenty of places to put your money instead of stocks. And you will end up with more of it in the end, instead of less. You have convinced yourself you are not chasing prices just because they are moving. You are chasing prices just because they are moving. Stocks need an actual functioning economy because they represent living companies. I see decline and need of bailouts.
Perhaps you speak of the precious good sir?
Why? I tell you why! You're the sucker that they are selling to.
Screw'em
There will be no top, only MOAR
There is no Dana only Zuul. [/Ghostbusters II]
It's not real anymore so the article is outdated,might have been useful when we had a real economy.
DING DING DING!!!! < Several Months ago..
Just BTFD...no money to be made shorting
Investors.com Investors Business Daily has about a 100% track record for calling the market tops accurately.
They are not that good at bottoms because of the huge amount of money that is available at market bottoms. But they always get the uptrend once it starts again.
They don't even know why they are bullish most of them
Top in 3, 2, 1...
The graph is starting to show a dick in mouth pattern
How many years have we been hearing this story?
Oh, about every ten minutes for the last five years.
But this time its different ...
Dr. Strangelove Part Two: How I Learned to Stop Complaining and Love HFT
https://finance.yahoo.com/blogs/michael-santoli/-irrational--sense-of-fa...
Goldman Sachs will tell everyone to go long.
bells have been ringing at ZH, but few beyond regular ZH'rs seem to be listening
I still recommend that one skips a diet of too much doom and gloom. Sunshine, a girlfriend, and a career is a much better prescription.
Zero Hedge can be toxic entertainment.
You can still buy stocks, but make damn sure you use trailing stops.
sure those will execute, given a flash crash where the cb's don't work properly? Pst.... Those are algo's too. Perhaps they could pull the plug on Hal9000. Or just re-set it to what ever point in time they feel suits the largest houses of ill repute. sketchy at best. Be careful out there.
Tigers and Lions and Bears!
Notice the lack of bulls.
Yeah, and hide them from the algos.
Ha! Most "investors" pensions, 401.....have no say in the matter. Those funds are where all the shit gets stuffed and they get a free ticket on the express elevator all the way down to hell.
when interest rates on borrowing are low, why would someone not borrow and buy stocks to make 10% a year, with 3% on dividends alone. Makes sense!! Ding..Ding...Dah...
WOW THE SEINFELD CLIP IS GENIUS. GENIUS!
Yes, but when will margin debt and S&P 666 meet?
Ever?
I hear the music and see the dancing, but I don't dance; and I'm quite fine sitting here in this cozy chair, watching from the side of the dancefloor. Some of these guys are pretty funny to watch dance! Gartman is doing the Macarena in Yen terms.
"The current levels of investor complacency are more usually associated with late stage bull markets rather than the beginning of new ones."
Ha, ha. Just ask JIM PUPLAVA, RALPH ACAMPORA, JEFFREY SAUT, JAMES ALTUCHER, JIM PAULSEN, THISRIDENEVERENDS, etc. They say we have just recently entered a new 'secular' BULL even though the 'secular' BEAR that was ushered-in in 2001 has been stymied twice by the PINKO COMMIES at the Fed and in Washington. Since the BEAR has been 'artificially' engineered to re-hibernate, I think we have a resumption of that BEAR on steriods----with not too much longer to wait...
THIS TIME IS DIFFERENT or didn't you get the memo?
didn't get the memo...we got the MOMO
I have an idea lets get the Long Island medium to channel Mark Haines. Since he called the bottom...he can obviously call the top.
https://www.youtube.com/watch?v=ZXMzolw3SWI
Truth is
The Public Be Suckered
http://patrick.net/forum/?p=1230886
Who is optimistic about their investments? Seriously, who is out there talking about how wonderful the stockmarket is?
All I've seen for three years is people screaming on about how awful everything is and how the market is on the verge of collapse. Please link me to a commentator who is genuinely, seriously, pitching stocks as being a "sure win" or a "guaranteed return" like they used ot in '06. Where are these market bulls everyone is talking about?