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5 Charts For Fully Invested Bears
Submitted by Lance Roberts via STA Wealth Management,
Yesterday, I discussed some interesting viewpoints relating to the Federal Reserve's quantitative easing programs. Part of that discussion was focused on a recent interview with famed Morgan Stanley strategist Gerard Minack who made a statement that struck home with me:
"The funny thing is there is a disconnect between what investors are saying and what they are doing. No one thinks all the problems the global financial crisis revealed have been healed. But when you have an equity rally like you've seen for the past four or five years, then everybody has had to participate to some extent.
What you've had are fully invested bears."
While the mainstream media continues to misalign individuals expectations by chastising them for "not beating the market," which is actually impossible to do, the job of a portfolio manager is to participate in the markets with a predilection toward capital preservation. It is the destruction of capital during market declines that have the greatest impact on long-term portfolio performance.
It is from that view, as a portfolio manager, the idea of "fully invested bears" defines the reality of the markets that we live with today. Despite the understanding that the markets are overly bullish, extended and valued, portfolio managers must stay invested or suffer potential "career risk" for underperformance. What the Federal Reserve's ongoing interventions have done is push portfolio managers to chase performance despite concerns of potential capital loss. We have all become "fully invested bears" as we are all quite aware that this will end badly, but no one is willing to take the risk of being grossly underexposed to Central Bank interventions.
Therefore, as portfolio managers and investors, we must watch the markets carefully for signs that the "worm has turned" and then react accordingly. This is something I cover explicitly each week in the X-Factor report (click here for free weekly e-delivery) but wanted to share five charts that I am watching very closely. These charts are all sending an important message, but it is only when the market begins to listen that they will truly matter. But when it happens, the message will matter, and it will matter a lot.
Volatility
One of the consistent drivers behind the bull market over the last few years has been the idea of the "Fed Put." As long as the Federal Reserve was there to "bail out" the markets in the event that something went wrong, there was no reason not to be invested in equities. However, when the Federal Reserve has been absent from the markets, bad things have tended to happen.
The 6-month average of the volatility index has been a good indicator of when things in the market have started to go "wrong" to a degree more than just a buyable dip. When the 6-month moving average of the index has turned up, it has generally been a time to become much more cautious about "risk" exposure in portfolios.
Junk Bonds
With the Fed standing behind the markets at every turn, and with interest rates plumbing historic lows, investors were emboldened to "chase yield" in the credit markets. While the financial product marketers (pronounced Wall Street) delivered a smorgasbord of "high yield" investments for consumption, many retail investors had very little clue the "high yield" actually meant "junk bonds."
With little concern for the additional risk being plowed into portfolios in expectation of greater return, the yields on "junk credits" were pushed to historic lows. However, those yields have begun to rise as of late and historically this has been a sign that the "love affair" with excess risk may be coming to an end. As shown below, the recent deviation between junk bond yields (inverted) and the S&P 500 has been a warning sign in the past that should be paid attention to.
Margin Debt
No risk in the markets, why not double down by leveraging up? Margin debt has recently hit historic highs in the market on a variety of different measures. Importantly, rising margin debt is NOT the problem. The problem comes when the excess leverage is forced to unwind due to rapidly falling asset prices. Margin debt, like gasoline on a fire, amplifies the downturn in stocks as falling prices trigger margin calls that forces more selling. That vicious cycle is what leads to extremely rapid market declines that leaves investors watching, paralyzed with fear, as their capital vanishes.
The recent deviation in margin debt from the S&P 500 was seen at both previous market peaks. Could it be different this time? Sure, but if it isn't there is plenty of "fuel for the fire" when it begins.
Deviation
I have written many times in the past that the financial markets are not immune to the laws of physics. What goes up, must and will eventually come down. The example I use most often is that of a "rubber-band." Stock prices are tied to their long-term moving average which acts as a gravitational pull. When prices deviate too far from the long-term moving average (36-months in this example,) they will eventually and inevitably "revert to the mean."
Currently, that deviation from the long-term mean is at the highest level since the previous two bull-market peaks. Does this mean that the current bull-market is over? No. However, it does suggest that the "risk" to investors is currently to the downside and some caution with respect to direct market exposure should be considered.
Sentiment
Lastly, is investor sentiment. When sentiment is heavily skewed toward those willing to "buy," prices can rise rapidly and seemingly "climb a wall of worry." However, the problem comes when that sentiment begins to change and those willing to "buy" disappear. It is this "vacuum" of buyers that leads to rapid reductions in prices as sellers are forced to lower their price to complete a transaction. This problem becomes rapidly accelerated as "forced liquidation" due to "margin calls" occur giving what few buyers that remain almost absolute control at what price they will participate. Currently, as shown by the combined chart of both individual and professional bullish sentiment, there is a scarcity of "bears."
With sentiment currently at very high levels, combined with low volatility and excess margin debt, all the ingredients necessary for a sharp market reversion are currently present. Am I sounding an "alarm bell" and calling for the end of the known world? Should you be buying ammo and food? Of course, not.
However, I am suggesting that remaining fully invested in the financial markets without a thorough understanding of your "risk exposure" will likely not have the desirable end result you have been promised. All five of the charts above have linkages to each other, and when one goes, they will all go. So pay attention to the details.
As I stated above, my job is to participate in the markets while keeping a measured approach to capital preservation. Since it is considered "bearish" to point out the potential "risks" that could lead to rapid capital destruction; then I guess you can call me a "bear." However, just make sure you understand that I am an "almost fully invested bear" for now...but that can and will change rapidly as the indicators I follow dictate.
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I like these 4 charts
http://blog.kimblechartingsolutions.com/wp-content/uploads/2015/01/globa...
"Should you be buying ammo and food? Of course, not."
DOH! And he was doing so well up to that point.
I'd recommend explosives too.....
And concertina wire.
Along with Rocket Motors, Black Powder as well as APCP http://en.wikipedia.org/wiki/Ammonium_perchlorate_composite_propellant, and KNO3-Sucrose Motors.
Here is a video on how to make APCP...
https://www.youtube.com/watch?v=TllMf7DzYkA
Entrenching tools, sandbags
Hoping for the best without preparing for the worst. Not exactly a winning strategy.
It burns when I pee sometimes
We've all been there. They have pills you can take, clear that right up.
Zithromax. Two Pills in one day...12 hours apart...
Hmmm...SHTF investment opportunity?
Maybe better than PMs
There's an app for that.
Buying No food. HA HA.
Food is for SUCKERS man!
"However, just make sure you understand that I am an "almost fully invested bear" for now...but that can and will change rapidly as the indicators I follow dictate."
Dude, your "indicators" are all lagging indicators. When this bitch blows its going to happen in something between minutes and days at most. It might be instantaneous. NOBODY is getting out of this alive if they're still in the building.
Minutes or days? You think we have that long when SHTF? My, aren't you the optimistic one?
Well, it depends on whether you consider a 6PM announcement that "banks and markets will not open tomorrow" to be an instantaneous thing or whether you consider that a multi-hour kind of thing.
damn ... a ' fully invested bear ' preparing to suicide his self. I must turn away !
If the Fed is holding the majority of the sorvereign debt and providing trillions at zero interest, how is it possible for them to be "absent from the market"?
Oh, Do tell.
QE at 85B a month for how many months? does anyone think that money is suddenly going to disappear, no it will be rattling around in the system for months or even years, with the Fed opening up the REPO window it has a chance to extend its effects even longer. additionally the VIX is no longer a reliable measure of volatility and investor sentiment is a measure how much is the Fed willing to get into this market (i almost forgot the PPT). a couple of knee jerk rallies off capitulation lows will help the BTFD crownd. next year is the election year, best guess they can keep the markets together until then. the Fed in its current state is a cabinet position, not at all independent (independent until it doesnt serve the needs of the encumbency) but that could change. there is reason to doubt comrade Yellens loyalty,and its really too late to axe her without severe political fallout.
With dollar denominated debt becoming harder for our trade partners to pay back, I guess everyone had better hope that the world keeps using the dollar...
Something about owing the bank $100 being my problem and owing them $1,000,000,000,000,000,000 being their problem.
Wouldn't it be great to have Yellen reach behind her neck and unzip that wrinkled munchkin suit, and have George Carlin step out and tell these fucks the party is OVER.
One can dream.
#41
Fed said "QE is over" but they also said "we will not shrink our balance sheet in this decade". So every piece of toxic junk that matures...they roll into new QE. Fed's balance sheet just hit an alltime high...how can that be if QE is "over"?
The real story is the CBs buying stocks, try betting against the ocean and see how you do.
Unlimited Currency spent upon finite resources ensures that eventually they will own everything.
Why bet? Why play that game? If we do not ACT to end the FED then the FED will end us.
Your Government is not going to act in your best interest. It is up to you and nobody else but you.
Even the supposed winners will be losers in the end.
That won't be the problem. The FED is going to get hit with something else, out of the blue that nobody saw coming, like for instance, a silly little "Audit the FED" bill that everyone assumes will die.
Or an attack from within, never can tell who your real friends are until one of them is smiling a toothy grin while ramming a 9" knife in your back. The FED is very vulnerable now, with so many dead bodies buried everywhere and skeletons stacked high in every closet.
Someone or something will see the opportunity. We're talking about Washington here, where everybody is in it for themself.
You sir, are an optimist.
these fully invested bears just flip over to the double inverse ETF, hey you're still long
Lance you may not be suggesting that we buy food and ammo, but I'm suggesting we do. Maybe add to that some guns to fire your ammo, and some barbaric relics too.
Zackly. They ain't all that expensive. Consider them the cheapest insurance you'll ever buy. You know, just in case.
top worry for the buyer in a deflationary spin, waiting for prices to come down even further, is that the change from low prices, to no supply is a very thin line. so gold is $200 but sorry there is none. (at that moment you say what about supply and demand? you want one of those charts, sorry none left)
I just aint got no stomach for this anymore.
[img]http://i.imgur.com/7NO2Fv5.png[/img]
http://www.marketwatch.com/story/house-passes-bill-to-delay-volcker-rule...
what a bunch of scumbags
It would have been just another finger in the cracking dam that is fiat money and fractional reserve.
“Meanwhile, community banks and Main Street businesses that are trying to put America back to work are suffering under the sheer weight, load, volume, complexity and cost of the regulatory burden that has been imposed by our friends on the left,” Hensarling said in a floor speech."
I used to wonder many moons ago, if there was a secret school these guys went to before they made any public speeches. A vocational program that specialized in platitudes, 2 syllable words, 3-word phrases based upon the pop-psychology of the era, class-warfare, and the tried & true, good vs. evil construct, etc., because every time any one of them steps up to the podium for a speech, they all follow the same script, style, poise and content. Fascinating.
Obama stole his campaign stump style from The Rock.
So...the FED is leading Bears around by a chain and rings in their noses.
All by design. No coincidence the Worker's savings are along for the ride.
Fully invested since 2010 no doubt, and with OPM.
So when is Mr. Durden going to pull the trigger?
I doubt Tyler owns a nailgun.
I love my Senco 601.
He sent out The Bear to do this ... and I'v been doing it for years ... I'v got a $3,000 write-off for the next 80 years.
"Despite the understanding that the markets are overly bullish, extended and valued, portfolio managers must stay invested or suffer potential "career risk" for underperformance."
That would neatly explain the rather bizarre 'turn-around' at the Poop-lava joint (FSN) for the past 3 years running.
"However, just make sure you understand that I am an "almost fully invested bear" for now...but that can and will change rapidly as the indicators I follow dictate."
Ok Hugh...
Yo he's got this shit man.
a FOOLY invested bear, I'd say