BNP Risk Indicator Flashes "Love" Warning Signal For US Stocks

Tyler Durden's picture

While the market itself has exhibited the exuberance we have all seen before (and never seem capable of learning from), BNP has quantified this love-panic relationship (and the news is not great for the bulls). When in 'love' mode, the average drop in stocks has been 12% in the next six months. The biggest drivers of this "love" have been investor confidence, CoT positioning, short-interest, relative trading volumes, and sectoral outperformance with fund-flows shifting away from "love" suggesting the short-term top is in. The index itself peaked last week at the highest level of "love" in two years...

h/t @Not_Jim_Cramer

BNP explains their framework:

In our Love Panic model, we try to identify distress and euphoria in an attempt to predict forward market returns. In order to successfully predict the market we have chosen parameters with good predictive capabilities during different market cycles but also those that make qualitative sense. Investment should be dispassionate but not automatic. Some investors solve this problem by hiring a mechanic (or quant) to build a machine to invest on their behalf. This indicator is not for them. Instead, this indicator highlights when market sentiment is either overly depressed or excessively optimistic. This helps one at least adjust for ones mood. So we suggest that when the market has reached a level of distress, it’s a good time to buy. Meanwhile, when investors are euphoric,we advocate a sell. As a result we have developed a contrarian indicator model. When our signal is in panic (negative), it indicates a buy. While when the signal reads positive it’s a sell signal. In our Love Panic model, we try to identify distress and euphoria in an attempt to predict forward market returns. In order to successfully predict the market we have chosen parameters with good predictive capabilities during different market cycles but also those that make qualitative sense.

And the market has not done well once investors fall in 'love'...

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scv's picture

hello friend

GUS100CORRINA's picture

Who makes up this stuff ... LOVE warning!!!

The whole world is making up excuses to buy the most overvalued equity market in history.

 

mind reset's picture

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Tim Knight from Slope of Hope's picture

Meh. Not that convincing.

FullHedge's picture

Trump is lovin it

Cassandra.Hermes's picture

I'm turning bearish because the reward does not justify the risk. The market cap of U.S. stocks has far exceeded the value of GDP, a sign of negative stock market returns.

Lizardking's picture

Investors have been in love with stocks for the past 8 years, dangerous game to try and predict a turnaround. 10K, 11K, 13K, 15K, 18K, 19K, 20K, soon to be 21K. I see more upside for DOW30 so if you get lucky and make some money on the short side take your profits while they last. GS will be over 300 sometime during next 2 years, AAPL will be above 150, etc etc

Fundies's picture

Well past Love Mode now......fully into Load Explosion from Hell Mode.

Iconoclast's picture

Rates should have been raised when the DJIA reached 13,500, there's zero chance of a signifucant collapse IMHO. Even 30% would only take us back to circa 16,000, above the long term average.

Mementoil's picture

I just checked Shiller P/E ratio yesterday and currently we're above 29.
This figure is higher than that of 2008, and has only been superceded in 1929 (Shiller P/E=30), and during the dot com bubble (Shiller P/E=~45).

I'd say we're in for a hell of a ride.