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The Stock Market - A Picture Of Excess
Submitted by Pater Tenebrarum via Acting-Man.com,
More Ominous Charts
We have decided to expand a bit on our recent post about “ominous charts” and show a few more charts that should at least give one pause. We hasten to add that none of them should be seen as timing indicators. It must be stressed that we continue to be in unprecedented situation, with central banks worldwide cutting interest rates to the bone with policy rates in the major currency areas having been kept at or near zero for an unusually long time period.

Party on dudes!
At the same time, central banks have actively printed money to replace the lack of credit expansion by commercial banks (resp. are continuing to do so), and not surprisingly they have proved quite adequate at this task. Most of this newly created money has flowed directly into securities markets. A few central banks such as the SNB and the BoJ are even buying stocks outright (the SNB e.g. holds a very large position in AAPL, among others). This mountain of newly created money keeps growing at an astonishing pace and is still rippling through the securities markets and the economy.
In light of this, many formerly tried and true indicators have seemingly ceased to provide us with any meaningful signals. However, we believe this has to be qualified a bit: the signals may not be meaningful in the short term, but they are likely to turn out to be of great long term significance. Right now, several important market sectors such as technology and financial stocks are in “break-out mode”, so from a technical perspective, one cannot yet sound the alarm, although we have been a bit surprised to find out that a number of prominent bears are saying the very same thing of late.
We cannot fault them for being well-trained by now; these are people who know the bubble will end in tears, but similar to Hugh Hendry of “blue pill” fame, they feel that their money management duties force them to respect technical break-outs, while keeping their eyes firmly trained on the exit door in the hope they will recognize the moment when the time to step through it has arrived, with their assets intact. Anyway, the upshot is that the charts below aren’t telling us when exactly the risk they depict will become manifest. All they are are saying is that the eventual denouement will likely be of stunning proportions, or putting it differently: risk is extremely high and growing by the day.
For starters, here is an update of the divergence in the Dow Industrial and Transportation Averages, which we recently discussed. Transportation stocks remain below the support line they recently broke, but in order for a Dow Theory sell signal to be given, the Industrial Average needs to break below its “equivalent” support level:
The Industrials Average needs to break below approx. 17,600 to create a Dow Theory sell signal. However, the long-lasting divergence between the two averages defnitely remains a warning sign of sorts – click to enlarge.
Today we want to show a few charts many of which are usually not receiving a lot of attention. The first one is an updated version of our Rydex asset charts. We only had to adapt the annotations slightly – the most noteworthy recent developments have been a further decline in bear assets to fresh record lows this year, as well as a decline in money market assets back to levels last seen in the 1990s.

Rydex assets and the SPX. From the top: Rydex money market assets, bear assets, and the pure bull/bear asset ratio. Rydex bears are becoming an extinct species, however, Charles Biederman of TrimTabs recently reported that there have been sizable inflows into bearish ETFs. The problem with these data is that it isn’t possible to tell who exactly bought these inverse ETFs, whereas in Rydex funds we can be pretty certain that they reflect the activities of retail traders.
Speaking of money market funds, here are two charts that compare investment in the stock market to assets held in money market funds. The first one, the equity/money market funds ratio, takes the total amounts invested in mutual funds and ETFs and compares them to the total amount invested in money market funds. The second chart shows retail money market funds divided by the market capitalization of the S&P 500. These are long term charts, which enables us to compare the situation at or near the beginning of the secular bull market (when stock market valuations were very low) to today’s situation.
Investment in equity mutual funds and ETFs compared to money market fund assets. Today this ratio is far more stretched than at the previous secular peaks, which were followed by two of the most severe bear markets of the past century – click to enlarge.
The retail money market ratio (retail money fund assets/SPX market cap) paints an even starker picture. There was a great deal of fear at the beginning of the secular bull market in 1982. The exact opposite is the case today (we suspect that apart from excessive money printing, this may be due to the popularity of Prozac and similar anxiety-suppressing drugs) – click to enlarge..
A chart we have actually frequently shown in the past is the mutual fund cash-to-assets ratio. Fund managers have altered their behavior dramatically over the past 30 to 35 years. Cash has truly become trash. Partly this is due to the fact that yields on “safe” near-cash investments are non-existent, and partly it is due to career considerations. Managers will be punished for missing a rally, but there will be no repercussions from being caught in a debacle with everybody else. Once again one can clearly see the stark difference between the situation at the beginning of the secular bull market in the early 1980s and today.
Mutual fund cash ratio: currently just 10 basis points above an all time low, at 3.5% – click to enlarge.
The point of all these charts is to show how little regard there is for risk, and how little money most active market participants are actually keeping in reserve. This means that once a meaningful decline gets going, there won’t be much firepower available to arrest it or slow it down (although there is of course a huge amount of money in the economy these days, but there is no telling how current money holders will deploy it in the future).
Along similar lines, it is well known that margin debt has recently reached a new record high. This normally means that the market will continue to rise in the near term, as margin debt usually peaks out prior to major market tops. However, the sample size on this phenomenon is small and there can be no guarantee that it will work in the same manner every time, so we would take this information with a grain of salt. As a result, the negative credit balances in NYSE margin accounts have never been higher than they are today. Once again, this implies that once a decline gets going, these margin accounts can possibly deploy any additional buying power– on the contrary, they will turn into forced sellers, which will exacerbate the downturn.
Available cash in brokerage accounts – or better said, non-existent cash in brokerage accounts – click to enlarge.
Doug Short publishes various charts related to margin debt, one of which shows margin debt and the SPX adjusted by CPI. The recent marginal new record high in margin debt attained in March this year can be seen on this chart:
The SPX and NYSE margin debt, adjusted by CPI. Normally, margin debt tends to peak before the market does, but the sample size bearing this out is small. Moreover, since everybody “knows” this, it may no longer be true – click to enlarge.
Valuations and Big Investor Fears
It is well-known by now that the CAPE (cyclically adjusted P/E ratio), or Shiller P/E, is at a level that is only exceeded by the levels reached in 1929 and 2000. Once again we point you to Doug Short’s excellent overview of valuations in this context. Moreover, as we have mentioned on a number of occasions, the median stock has never been more expensive than today. There can be no doubt that valuations are excessive. John Hussman attacks the faulty “Fed model” again this week (as we noted when we showed this chart of Japan’s stock market compared to interest rates, contingent circumstances can easily invalidate such models) and provides us with a different look at valuations, which we reproduce below.
Via John Hussman: the market cap of non-financial equities divided by gross value added, including foreign revenues. This measure indicates that the market is currently at the second most overvalued level of the entire post WW2 era – click to enlarge.
One question that suggest itself in view of such data is whether anybody is actually worried about this. When looking at the sentiment and positioning-related data points we have shown above, one might come to the conclusion that there is no concern at all. However, this isn’t quite true. One method of tracking a group of investors that is generally not regarded as a contrary indicator, is by looking at what is happening with options on the S&P 500. These options are quite expensive in absolute terms and not very popular with small traders and retail investors. However, they are used extensively for hedging purposes by big traders.
Some time ago CSFB has devised a “fear barometer” that shows what entering a zero-cost collar implies in terms of how far out of the money the protection is that can be theoretically bought at no cost by selling a specific call. Essentially this is a variation on the Ansbacher Index, as it compares the premiums paid on calls with those paid on puts – employing solely SPX options.
It works as follows: first it is determined how much one can receive by selling an SPX call expiring in three months time that is 10% out of the money. Then one searches for an SPX put that can be bought with the proceeds, or rather, one calculates how far out of the money this put is based on current premiums, i.e., by what percentage the SPX would have to decline for this put to become an at-the-money put (calculation is required, as neither a call strike that is precisely 10% out of the money nor a put option with an exactly similar price are likely to exist except for brief moments in time). The result is plotted as an index – i.e., the height of the index shows the above mentioned percentage. The higher the index, the more expensive SPX puts are relative to SPX calls. The index thus expresses the urgency with which big traders are seeking out protection against a sizable market decline.
The CSFB fear barometer has been near record highs since mid 2014. Note how low it was at the depths of the 2007-2009 market decline – clearly, this is not a contrary indicator. Big traders are paying up for protection, a sign that they believe the market is very dangerous at current levels – click to enlarge.
Once again, this is obviously by no means a precise timing indicator. We are struck though by the persistence with which big traders have paid up for protective puts, resp., how reluctant option writers are to sell them. It will be interesting to see what happens if the market continues to rise. Our bet would be that in this case, the fear index will reach new all time highs. We observed the very same development in NDX jumbo options during the Q1 2000 blow-off in the Nasdaq Composite Index. NDX puts kept getting more expensive the higher the Nasdaq went. It was a strong sign that a denouement was not too far off.
The Biggest Red Flag Yet
A few days ago the very worst thing that could possibly happen to stock market bulls actually happened. According to an article at Zerohedge, the following news flashes came across the Bloomberg wires:
*BERNANKE: NO LARGE MISPRICINGS IN U.S. SECURITIES, ASSET PRICES
*BERNANKE: HOW TO MANAGE ASSET PRICE DROP SCENARIO MORE CRUCIAL
Given the former Fed chief’s well-known and often demonstrated utter cluelessness about asset mispricing, which he frequently displayed during the latter stages of the housing and mortgage credit bubble the Fed instigated between 2001 and 2007, the above information is undoubtedly a major red flag.
Once again, it is not an indicator that can be used for timing purposes, except perhaps in a very general manner (last time around, Bernanke’s lead time was roughly between 12 to 6 months relative to the stock market peak, but it was much shorter relative to the median home price peak – in fact, several of his utterances with respect to the housing bubble were made after the peak had been quietly recorded in mid 2006).
Apart from the fact that when Bernanke feels compelled to state that assets aren’t mispriced, we can be 100% certain that they are in fact egregiously mispriced, his second statement is likewise ludicrous. How is the Federal Reserve supposed to “manage” an asset price drop scenario? If it could magically keep crashes from happening, no crash would have happened in 2008, or at any other occasion since the Fed has been in business. The reality is that it has presided over the by far worst crashes and bear markets in all of history. There is nothing that can be “managed” – the errors that are committed due to its manipulation of interest rates and money supply growth cannot be “uncommitted” retroactively. When the inevitable moment of price adjustment arrives, it will happen regardless of what the central bank does at the time. Bernanke evidently suffers from the “potent directors delusion”.
In addition to this, Bernanke has quite likely also just ensured a severe hard landing for China and a recession in the US (for details see this Reuters article: “Bernanke sees no risk of hard landing in China, bullish on U.S. Economy”). Maybe China’s Politburo should consider applying for a gag order to be imposed on Bernanke, otherwise China’s vaunted social harmony may soon be in serious trouble.
Conclusion
It is important to keep in mind that none of the data shown above mean that the stock market cannot rise further or that it will decline in the near future. It is unknowable how much more pronounced these excesses can become, especially in light of extremely loose monetary policy around the world. Things could easily become quite dicey as soon as tomorrow, but it is just as easily possible that valuations will continue to expand for some time yet. However, these data do indicate one thing: risk has increased enormously, and it will keep increasing the longer the bubble persists. We have said this before of course, but it is even more true today than it was then.
Frankly, the situation also scares us a bit, because we expect that governments and their agencies (such as central banks) will find it extremely difficult to deal with the next crisis. They have become quite overstretched as a result of the last one. After having gone “all in” last time around, what are they supposed to do for an encore? The only options that come to mind are repressive measures such as capital controls, confiscation of private wealth, and a host of other unpleasantries. Moreover, one must expect various radical political organizations to gain a lot of electoral support, as voters will rightly consider the establishment to have failed. This danger is especially pronounced in Europe, where the free market has very few supporters to begin with, and the political class and its media mouthpieces are highly likely to once again blame non-existent “lassez faire capitalism” for the failures of socialistic central planning institutions.
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TOGA! TOGA! TOGA!!
They're gonna nail us no matter what we do!
https://www.youtube.com/watch?v=18eaNSxhK5c
Margin calls will do this market in...period, no other major events will be required, just a small normal 10% correction at this point and it's over... no stopping the landslide once it starts.
Watch the bond market, there will be a come to Jesus moment when payments are missed and loans are called....
...Or posted collateral is marked down, and there's no more where that came from.
Collateral? Merely another barbaric relic....
The Roman Circus was the last part of the Empire to shut its doors when the Barbarians entered the gates.
They became cannibals at the very end.
They became so dependent on a system, that when it collapsed they killed themselves.
If you know history, you know the current situation is all bullshit ready for a great, big flush.
Those charts are too complicated. We need some at Sesame Street level for the muppets. It really doesn't matter though, ALL markets crashes are a surprise of the bending over in the shower variety....
I'm starting to like shorting usd/jpy. The trade has gotten way past the yield of UST, and is about 3% overvalued vs $usdx at previous high vs usd/jpy. It's the last day of the trading month tomorrow and we have the GDP revision, so I expect some consolidation.
The $usd is overbought and looks like it's consolidating on the 5-h chart.
perhaps only on a short time frame, which may be enough for you. until the Fed talks about 'easing' rather than 'tightening', the USD will continue up....and continue to knock oil, and continue to erode revenues and earnings, making the mkt more expensive.
its getting past time, the US got weak while euro got stronger, now we got strong, let them get weak so they can 'grow'....but theyre just gettting weaker and old yeller cant find a reason to ease.
last time we had weakness in earnings and mkts looked like 'peak expensive', we got QE3/4....this time were going to tighten???
The risk (beatings) will continue until morale improves.
Here is a hot tip, so listen up (50% chance of rain)
We talked about Dow Theory at the beginning of the month...
http://www.globaldeflationnews.com/dow-jones-industrial-averageelliott-w...
But even without a Dow Transports non-confirmation of the Industrials, the Dow structure is screaming a topping process and an imminent implosion...
http://www.globaldeflationnews.com/dow-jones-industrial-averageelliott-w...
Great point, how true, it's screaming, but banksters hold the critical mass of levers needed to keep lipstick on this pig.
Shorts are either very good at what they do and know when to exit, or they are are getting exhausted with the waiting game.
Perhaps the cataylist will come from some exogenous negative factor.
I misread The Shock Market again..ahhh
It's a bubble, pure and simple.
DavidC
They need to hand out toasters and nail guns as party favors at those bread & circuses parties.
i smell HO on the horizon....
I have received two notices from two local banks that I have direct business with and both sent letters in the past couple of days stating nearly similar things: "We will be performing a major upgrade to our core processing systems....that will be effective on June 22nd 2015 (Monday)....our Bank Team has been planning for many months,,,,there will be some service disruption the weekend of June 19th 2015, most importantly ALL bank offices will be closed on Saturday June 20th, 2015..."
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Anyone else receiving something similar from their banks? Probably a coincidence, but the timing is ominous given the current environment we are in...makes me a little paranoid.
A. That is normal. System updates are implemented and tested on the weekend so its BAU on Monday. A must have for banks.
B. Small local banks aren't privy to anything major, as in bank holiday.
One is a small bank and the other is not so small...and the dates were the same and the phrase "planning for months" caught my attention. I have had outages for updates on many financial sites, but just not to this degree. I suspect you are probably correct, but thought if anyone else received anything similar, then it goes beyond coincidence. Thanks for your thoughts...appreciated.
After that, when I close my eyes, I see squiggled lines.
Not sue if you can look at transportation stocks the same way as in the past. When the USSA's major manufacturing is building burgers, you don't have as much of a need for transportation.
The picture above is like the "bacchanalian festivals" the Romans routinely engaged in near the end of the empire.
https://www.google.com/search?site=&tbm=isch&source=hp&biw=1366&bih=647&... (Google Images - not for children)
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Dionysus then, according to Greek mythology, spawned a religion, a religion of ecstasy, and emotionalism. And the Dionysian cult, this religion of ecstasy and emotionalism, this frenzied kind of religion, saturated the Greek and Roman world. The Dionysian cult was a debauched form of worship and a popular, a dominant form. (Not unlike America's current cultural values)
The worshipers committed atrocities with human organs. They engaged in orgies of sexual perversion, along with music and dancing and feasting. But there was one common element to all of the Dionysian debacle and that was drunkenness...drunkenness. In fact, if you ever circulate in the Middle East or in the ancient Roman world, you will see Dionysus associated with grapes. When there is a statue or a tribute to Dionysus, some monument to Dionysus, it is always marked out by clusters of grapes because he became known as the god of wine.
The Greek name of Dionysus became in the Roman language, Latin, Bacchus. And Bacchus is the Roman god of wine. When people engaged in these unbelievable drunken brawls, they were called Bacchanalian feasts. And if you've studied any of that, that's a familiar term even today. Take your dictionary out and look up Bacchanalia and it will say a drunken orgy. - source "Divine Pattern for Relationships" GTY.org
“Risk has increased enormously, and it will keep increasing the longer the bubble persists.”
A major verdict of history: When men fail to correct a wrong, they only delay redress… and multiply injuries.
“The only options that come to mind are repressive measures such as capital controls, confiscation of private wealth, and a host of other unpleasantries.”
There is, unknown to all but a handful of Americans, another option: redress of grievances.
This is the option we must learn, and use, if we are to avoid those “unpleasantries.”
Otherwise we will suffer under the reign of terror enforced by the American Department of Homeland Security.
By the act of Congress that established the DHS a system was created by which informers could make false allegations against anyone they please with near-total impunity. Of course, such informers aren’t described as informers; rather they are given the title “submitting person” and the DHS Act provided that their falsehoods will never be examined by any court or legislature or law enforcement agency. The legislation even specifies how this immunity is obtained. The “submitting person” only has to give an “express statement” that his lies were “voluntarily given” and that he expected “protection from disclosure”. It’s all there, in the act that created the DHS.
I’m sorry guys, but silly season is over. Even if you own physical gold, live in a cabin in the woods along with a stash of ammo and AK-47’s, you lose. If you don’t fall to the horde of hungry homeless, you will fall to DHS death squads. All the homeless have to do is to wait until you collapse from lack of sleep (24, 48, 72 hours), then they march in, slit your throat and… let your imagination run wild.
If you own stocks or bonds, guess what: you’re depending on criminal and useless classes to deliver your purchasing power at the moment of their greatest victory. Did I mention something about ‘silly season’?
If you want to survive, you have to combine with others of like mind for the purpose of mutual protection, among other purposes. The big question now is, ‘HOW is this to be done?’ And the quick answer is, ‘You must establish First-Amendment assemblies – the only historically-proven method by which men have made their lives and property secure from rule by thieves.’
The American Revolution, for example, was powered by a large network of such assemblies: from town meetings, county meetings, state conventions and, ultimately, to Continental Congresses.
Let’s be realistic: this solution won’t be easy or quick… unprecedented adventures never are. Still, it is guaranteed to give unprecedented meaning to your life.
The one thing that keeps bugging me is the extreme money printing. Since 2008, the monetary base has been expanded by more than 400%. When we consider how fractional reserve lending works, that expands the money supply significantly more.
What I'm getting at is the possibility that the markets are not overbought as much as they are showing the inflationary effects of QE (i.e. mone printing). In other words, by normal measurements, yes we'd be ready for a correction but things haven't been normal since 2007. We are truly in uncharted territory.
How much farther can this market go before a major correction? Who knows. Yes, we are starting to see signs of an economic contraction but we've seen that before. I think we are at the point of another major downturn. But it doesn't matter what I think. We need CONFIRMATION.
For me it's all about jobs numbers. That is the confirmation. We have not seen major layoff's yet. When we do, we'll know. I'm looking for sustained jobless claims above 400K like we saw in 2008. I'm not looking for the top, I'm looking for confirmation.
p.s.
One thing is CERTAIN. This recovery has been largely a sham. Instead of addressing the root cause (derivatives) in the form of too much risk, the government quadrupled down on the same banksters who crashed the system. Today they act with impunity and laugh at the fines as they are but a fraction of their illegal profits. The greatest wealth transfer in history has been taking place and the middle class continues to shrink leading millions into poverty while the .01% literally controlls our government. This cannot last. When it comes crashing down, it will not only affect the markets, but we could witness significant civil unrest across the globe as can be witnesssed with the worlds governments preparing for something big.
The Fed doesn't give a fuck about jobs. But they know that the jobs numbers will never improve so they use "high unemployment" as a convienent excuse to keep rates as low as possible as long as possible to fuel the US housing and stock market orgy. Their job is to create fiat as quickly as possible, apart from tightening randomly and excessively every 5-10 years to feel powerful & help wall st shear the sheep by 40-50% during the resulting drop.
Also note: the Apple watch is a flop!