The Carnage Beneath The Bullish Stampede

Tyler Durden's picture

Submitted by Wolf Richter via The Testosterone Pit blog,

It’s part of the daily routine by now: the S&P 500 index rose to another all-time high. We’ve been confronted with this miracle for a long time. The last correction when the index dropped over 10% was, well, if anyone can even remember, in 2011. And it shows.

Every single bearish call on the S&P 500 has been punished with a rally, followed by ridicule. Realism got to be very expensive for those hapless daredevils. Financial advisors lost clients over mentioning the possibility that the market could someday head south. To save their own skin, they did what it took: an all-time record 62.2% are bullish, up from 58.3% a week earlier, above the exuberance line of 55% for the fifth week in a row, above the prior record of 62.0% set in October 2007. Which wasn’t, it turned out, the ideal time to be bullish.

“Danger territory” is what Investors Intelligence, which compiled these numbers, called the phenomenon where everyone is comfortably relaxing on the same side of the boat.

“Almost all clients have the same outlook: 3% economic growth, rising earnings, rising bond yields, and a rising equity market,” Goldman Sachs chief equity strategist David Kostin wrote in a research note a few days ago after he’d met with numerous institutional clients. They considered Goldman’s own forecasts for the S&P 500 – 1900 by the end of this year and 2100 by the end of next year – too conservative.

Risk is no longer priced into anything. Volatility has gone to sleep. Uniformity of thought has taken over the stock market. Complacency has reached a point where even central banks have begun to worry about it: the idea that markets can only go up – once entrenched, which it is – leads to financial instability because no one is prepared when that theory suddenly snaps.

Even the Fed is frazzled by the absence of frazzles.

By practically guaranteeing with their verbiage and their trillions for the past five years that asset prices would rise forevermore, the Fed made sure that markets have become a one-way bet, that risks are eliminated from the calculus, that everybody is comfortable with that, and that therefore volatility has settled on record lows.

So it’s ironic that New York Fed President William Dudley would suddenly, as he said last week, be “a little bit nervous that people are taking too much comfort in this low-volatility period.” He was worried that these folks would “take more risk than really what’s appropriate.” Others have chimed in. “Low volatility I don’t think is healthy,” explained Dallas Fed President Richard Fisher, concerned about “a little bit too much complacency.”

But all this bullishness, this complacency is only skin deep. Beneath the layer of the largest stocks, volatility has taken over ruthlessly, the market is in turmoil, people are dumping stocks wholesale, and dreams and hopes are drowning in red ink.

The 50 stocks with the largest market capitalization in the Russell 3000 index are up a not too shabby 4.1% so far this year, while the rest of the stocks in the index (51-3000) are on average down 1.1%. But this average papers over a much uglier reality. Charlie Bilello at Pension Partners did the math in an excellent report. The Russell 2000, which covers the smallest 2000 stocks in the Russell 3000, peaked on March 4. Since then, the 50 largest stocks have climbed 3.8%. And the rest? Here is how they fared by market capitalization rank:

Since March 4, the smallest 500 stocks in the Russell 3000 have plunged 14.7%! The smallest 1000 stocks have dropped 8.4%. But even these averages paper over the bloodletting among individual stocks.  

The greatest hype sectors have been hit the most.

“Cloud” computing – which boils down to renting server space and software off premise – was where our revenue-challenged tech heroes, including Cisco and IBM, saw their salvation because it would be the growth area of the future. The smaller companies in that sector are now careening south.

Other stellar performers: social media outfits – including Twitter, down 54% from its high in December – biotech stocks, ad tech stocks.... Oh my.

Ad tech stocks used to be a white-hot sector. Rubicon Project, whose IPO was in April, is already down 44% from its high. Criteo, which went public in November, is down 50% from its peak in March. Tremor Video, which went public about a year ago, is down 65% from its peak in November. Rocket Fuel, which went public in September, is down 68% from its peak in January. Millennial Media is down a cool 85% from its peak, which was its IPO in 2012.

The Wall-Street hype machine is currently busy explaining that this brutal turmoil and “volatility” beneath the surface, beneath the largest five hundred companies, is just a routine rotation from small caps into the mastodons of the stock market, with the largest 50 stocks benefitting the most. What it is currently not very busy explaining is why the many stocks it had hyped by hook or crook to push them to ridiculous valuations are now getting annihilated. Better not bring it up.

But why worry, with the S&P 500 hitting new highs day after day! Extreme bullishness rules! At least on the surface, and among hard-pressed financial advisors. Meanwhile, the “larger, institutional players are systematically rotating out of illiquid small-cap names and hiding in names with the highest liquidity,” Bilello writes. “They are at the very least anticipating a more difficult market environment to come and likely something more severe.”

So that record-breaking bullishness among financial advisors – people whose job it is to advise regular folks what to do with their life savings – is not shared by the big money, and presumably the smart money. They’re busy battening down the hatches.

And throughout, the most important “data” Wall Street hands out via its army of analysts to rationalize these lofty mega-cap valuations is consistently the biggest hoax out there. Read.... The Big Hoax Of The Wall Street Hype Machine

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TeamDepends's picture

Whatcha got, boy?

knukles's picture

Well Doc, my thing leaks all over the place and I can't stop it even though it's still up....

TeamDepends's picture

I, er, my health-partners at Kimberly-Clark have a special product which just might be what the doctor ordered!  (falls over laughing)  It's called the Upstanding Male model from Depends, carefully engineered for a mans special needs....

Boris Alatovkrap's picture

In Russia, is made from stretch out entrail of sheep.

Headbanger's picture

But can it cure my 1952 Tula SKS from popping primers??

And this with Tula ammo to add insulkt to injury and horribly dirty bolt & carrier. WTF!?


Timmay's picture

Someday, maybe soon, someone is going to look at their ridiculous paper "Wealth" and they are going to want to take their ball and go home. Someone is going to want to claim all that digital and paper wealth, others will try to follow suit.

What happens next??

Never One Roach's picture

US pensions ‘cash negative’ by 2016


America’s sprawling 401(k) pension system will turn cash flow negative in 2016, threatening disruption for asset managers and selling of equities, according to analysis by Cerulli Associates, a research house.

dryam's picture

So, what gets this train wreck started?.....

Rising oil prices
Credit collapse instigated by someplace near or far
The rest of the world not wanting USD's printed out of thin air
A geopolitical event
Countries moving towards direct trade with each other (oil for food, etc) & skipping the currency part
Combination of the above

Boris Alatovkrap's picture

Momentarily "wealth" is float in bank-o-sphere, but you are right, soon wiser fool realize there is no greater fool, and soft asset is quickly seek out hard asset, faster than crab lice flee from private region of young army cadet when apply septic powder.

logicalman's picture

Your only real wealth is your skill set.


KnuckleDragger-X's picture

I'm tending to bet on people looking at China's little rehypocation problem are going to start getting people to start wondering about other metal holdings like Comex, then the fun will start.

techstrategy's picture

Quant option algos and tacit collusion amongst institutional longs has destroyed the market.  Your ETFs are getting stuffed with future losses by option/float manipulation.

Boris Alatovkrap's picture

ETF is stuffing like bloated pork intestine during making of sausage. You are better not know ingredient before consumption.

Kreditanstalt's picture

Monday: the "market" will gap up, either in the off-hours or upon opening, rising quickly to the appointed new level for the day.  They will then cruise along on low-volume autopilot until the 3:30pm ramp.  Repeat again each day of the week until J6P starts borrowing again.

buzzsaw99's picture

maybe those small cap ceos should get with the damned program and do levered stock buybacks and take huge bonuses like everyone else. effing pikers.

I Write Code's picture

you said:

Even the Fed is frazzled by the absence of frazzles.

No it ain't, it's all their doing, and the spike in bonds wasn't in the plan.

GotGalt's picture

As the mature bull market labors up and up on the backs of fewer and fewer companies, the top gets closer and closer.

exartizo's picture

what's wrong with this picture: keeps going down and down and down.... a world that is daily becoming less and less and less stable.

...and in which assets of every kind are priced not by markets, but governments desperate to prop the appearance of normal economic fixture function in the hopes of stimulating sufficient consumer demand to keep the Ponzi going at all costs.

i'm so surprised this hasn't ended badly.

yet.'s looking more and more like 2016 before tshtf.


Boris Alatovkrap's picture

Do not surprise that powerful men that is create paper wealth from the thinnest airs can also control price of Gold... for short season. Winter is come soon that is decimate both sheeple and false shepherd alike.

logicalman's picture

Decimate actually means to destroy one tenth - it's a very much mis-used term.

When TSHTF a lot more than a tenth will be destroyed.

Just tying to help with your English skills.

No disrespect, other than the decimate thing, you are dead-on.


bulldung's picture

I wonder if the large purchases reportedly  by sovereigns on this site are for the purpose of smack down whenever PMs get heated.

logicalman's picture

Of course, infinite growth is not a problem as we have unlimited resources.

Boris Alatovkrap's picture

Infinite until run out of zero.

logicalman's picture

If there's not an infinite number of zeros, how can there be an infinite number of anything else?

Just a thought.

RaceToTheBottom's picture

All the sane people have left the building.  The only remaining people in the Insane Asylum are the patients.

flyonmywall's picture

Forget the SKS. Have that as a last ditch backup weapon or to give to somebody to use. Clean it up, oil it, put it away, and get yourself a good HK.


No Quarter's picture

HK products are excellent (love my USP Compact) but Cost to value i like SIG 716/516 varients over HK/FN

GooseShtepping Moron's picture

I see bubbles within bubbles.

The mega-caps have the wherewithal and the connections to do the leveraged buy backs and pump up their stock, meanwhile the smaller guys get "rotated" out of. The very strength of the large-caps helps to explain the underperformance of the small-caps. That, and all the excess liquidity.

Unfortunately we will not see a (nominal) correction yet. The hot money flowing out of Europe will likely spike the indices up to dizzying heights. After that, I'm predicting something will happen that will surprise almost everybody: Yellen will announce full-on taper and will slighty raise rates. That will finally get the stock market's attention.

dragoneyes74's picture

Let's talk COT reports.  First a small rant.  With modern computer technology it should be possible to have all the reportable positions uploaded and automatically updated within an hour of the close of trading on Friday, so it can reflect that entire M-F week, as opposed to the 3-day delay and a weekly tally that only includes Tues-Tues.  No excuse.  Rant over. 

This COT report includes the triangle breakdown in gold and silver at the end of the previous week.  And it shows a significant increase in new short positions by the Large Specs.  It also shows the long side of the Large Specs in gold did not decrease, in fact, they added a small amount of more longs.  So it seems they are not afraid, which may intensify the liquidation if the downside accelerates. 

If you want to spin this as a bullish situation, you would point out that the last time the Large Specs in silver were this close to a net flat position was the bottom last June.  Meaning, the Commercials are positioned as bullishly as ever.  In normal markets there is a back and forth swing between the Commercials getting extremely net long then back to extremely net they fade the Large Specs.  However, in gold and silver, the Commericals generally never get net long, so a position this close to net neutral is as bullish as they get.  I just went back ten years and this is as close to net neutral as they've been in that time, except for possibly last June.  

So if the metals are going to break to new lows it will be based on positioning that hasn't happened before.  There are a lot of Large Spec longs from above $1280 who have to be underwater on their position.  How much lower can they go before they capitulate?  Are we going to repeat April 13' soon, or will the Commercials step in at the lows and pulloff a textbook market reversal?  I don't have the answer, but that's what to look for.  A reversal is playable to the long side.  I may play a breakdown thru the recent lows at $1240 to the short side.  I also expect any rally into the $1280/90 area to be sold both from longs wanting to get out and shorts looking to add.  The bottom line is the bias here has to be short until a bullish catalyst like a market reversal off the lows or a technical breakout occurs.  I am still hoping for one of those to happen so I can play it on the long side and then short it for a larger move down from higher prices.  Fed day is June 18th.

The Large Specs in the Euro are net short -33k and decreased their long position significantly, but this does not reflect Draghi Day.  So I wonder who did all the buying on that reversal.  This market is now stuck between two reversals: the one from 1.3993 and the most recent one at 1.35.  While Thursday was a technical reversal, the long side of this market makes no sense to me, so if there isn't follow through soon, I'm bailing on my small long position until one side of the dueling reversals breaks.  I would think that will be a trending move, but it could take awhile. 

The Large Specs in the ES actually increased their net short position to -80,112 futures contracts, but that doesn't reflect the last two days of straight up action, which presumably was a great deal of short covering.  I would think next week this will be signifcantly lower.  The Small Specs increased their long position by 28k, so the long side of the market is in weaker hands.  However, the Large Specs have been trying to short the market all year and somehow the Small Specs have won the battle, so without a sustainable bearish catalyst you can't assume the weaker hands won't continue to win.  For me, the buy zone in the ES is from 1900-1930.  It will be a game time decision based on price action.  Obviously, the lower the pullback goes in that range, the more aggressive I can be.  I just hope we get a pullback at this rate.  I would think there will be a lot of players looking to get long there, and a lot of current shorts looking to bail, so it should find support.  I plan to mostly focus on the ES and NQ for the foreseeable future.  

You can make the case that much of the price action in equities this year has been orchestrated around options expiration. In Jan the selling started after expiration and was severe enough to cause a lot of put buying, then ended in early Feb and went straight up, making sure all those purchases became worthless.  In March and April the down move ended on the Monday of options expiration week, again making put protection worthless.  In May the relentless buying streak started on expiration day and there's only been one down day since.  My point is with Quad witching a week from Friday there's a good chance we get some volatility this week to entice some put buying that will become worthless.  Another pattern this year has been to force a squeeze heading into anything related to Yellen.  So if these patterns continue, we might see selling this week, particularly the latter half, then a squeeze into Fed day and possibly beyond.  Hopefully, this will provide a pullback.  

Here are five ways I think this market can top:

1.  If Kuroda slows down their QE program and the Yen strengthens, unwinding the carry trade.  Unlike most of the driving forces of this market being psychological, the carry trade unwind is based in real-world transactions that can force liquidation, which will then fuel the psychological forces in the other direction.  If Kuroda actually renews their committment, or increases their purchases, it should only amplify an already insane market as the Yen breaks down even further.  One day, though, as Kyle Bass notes, if Japan achieves actual inflation, there will be no allegiance to their country from the bondholders.  They will sell and it will quickly turn into a riot.  This is my opinion of the most likely trigger to end the bull market.  So the BoJ is as important as the Fed.   

2.  The positioning on the bull side gets so extreme that the tiniest catalyst starts an avalanche of selling b/c there is no one on the other side of the market sitting there waiting to buy.  This would likely take awhile as the current positioning is nowhere close to extreme.  Although, sentiment is.  But sentiment can stay that way for a long time.  What matters is the practical underlying positioning when someone somewhere yells sell.  

3.  A black swan event along the lines of war, or a terrorist attack, or aliens landing and blowing up cities with laser weapons.  

4. A technical breakdown.  The current weekly trendline in the ES from the Oct 2011 bottom runs thru 1850-ish.  So the market has to maintain the bullish pace of the last three years to prevent losing momentum long enough to push through that trendline.   If this happens when positioning is extreme, it will create a sustainable bearish catalyst.

5.   Oh yeah, deteriorating data.  I don't remember what it's like to trade on actual data.  As the Fed continues to withdraw, if all the optimism of future growth becomes the reality of not happening, that will cause a problem.  You have to keep in mind, though, the longer the market stays near all-time highs as the Fed withdraws the more confidence grows that if the market truly starts selling off, the Fed has the room to jump back in. 

Until then, now that we've had a breakout, the bias has to be long on a pullback with hyper awareness that what is happening will one day end badly.