Rosenberg: This Bull Market Is Many Things, But "Unloved" Is Not One Of Them

Authored by David Rosenberg via Financial Post,

In the AAII survey of retail investors, only 29 per cent are bearish — 36 per cent are bullish and the remaining 35 per cent are neutral. Where’s the hate?

Maybe it’s apropos that just as investors celebrate the longest bull market on record (actually debatable since this is a spurious and subjective definition of 3,354 calendar days without a 20 per cent correction), we had the party interrupted by the latest drama unfolding at the White House. Though as Wall Street legend Bob Farrell always said, it is the market that makes the news, the news does not make the market.

A guest on CNBC on Wednesday morning said this is an “unloved market” when discussing equities, and I hear that refrain often. So it’s funny then, that as I opened up my morning papers, I saw this on B1 of the USA Today — Bull Market Soon to be Longest, Has Room to Run with the subheading “Despite Numerous Scares, No Sign of Bears.” So tell me, how exactly is this an “unloved market” if there is “no sign of bears”? The USA Today article actually cites a Gallup poll showing that 45 per cent of households have sat out this bull market, which means the majority did participate — yet this is somehow labelled a stock market that is “unloved.” Never mind that equity exposure today on U.S. personal balance sheets has only been exceeded once before and that was in the late-1990s tech craze. I just don’t get it. But if you’re still long U.S. equities, please have a different reason than this drivel about this being a hated and under-owned asset class.

Let’s now assess the market as the bulls celebrate the alleged longest bull market on record. Breadth is a really big issue. On Tuesday, we saw four Dow components account for all of the 63 point gain in the blue-chip composite. And this followed, as we highlighted, five companies being responsible for more than 100 per cent of Monday’s 89 point advance. For the year as a whole, four flashy companies - Amazon, Netflix, Microsoft and Apple - have accounted for 40 per cent of the overall 7 per cent increase in the S&P 500.

As per Bob Farrell’s Rule #7: “Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.”

Here are the facts.

This is a very narrow move to the highs. Only 2 of the 11 S&P 500 sectors are at new highs! At the prior January high, 8 of the 11 sectors were at new highs. What does that tell you? It means a much lower level of participation and this is what happens at a double top historically. Back on Jan. 26, the share of stocks hitting a new 52-week high that very same day was 25 per cent. On Tuesday, as we hit that intra-day peak that could not hold in the end, the share of stocks achieving that pinnacle of also testing a 52-week high was down to 8.5 per cent. Back on Jan. 26, the share of stocks down 10 per cent or more from their individual 52-week highs was 22 per cent; Tuesday, at that failed test of the highs, we saw 43 per cent of the market still off 10 per cent from their 52-week peaks. Another sign of poorer participation, at those Jan. 26 highs, 83 per cent of the S&P 500 was trading above the 200-day moving average, and on Tuesday that number was below 68 per cent.

History may end up proving that just as investors celebrated the longest bull market ever, defined as the length of time without a 20 per cent drawdown, the very same day we saw a classic double-top that defined the end of the bull market. How ironic if this proves to be the case. But the second failed attempt on weaker internals, as we saw on Tuesday, is highly reminiscent of the topping process we saw in 1990 (June 4 peak followed by a failed retest on July 16), 2000 (the March 24 peak followed by the ensuing failed attempt on Sept. 1), and 2007 (July 19 followed by Oct. 9). Additionally, volumes Tuesday were more than 10 per cent lower than the last time we hit the peak in late January — a sign that institutional investors are just a tad more wide-eyed than the typical pundit being interviewed on bubblevision. Even when it comes to technicals, ignore history at your peril.

I should also add that the U.S. joined India and Norway as the only countries achieving “record” status when it comes to stock market prices (though time will tell if what we saw Tuesday was just another failed test). Keep in mind that, when it comes to the entire world, 28 per cent of the companies that make up the global index are still in an official bear market (as in, down 20 per cent or more from their highs). Yet another sign of a lack of broad participation — not everyone received an invitation to this party.

Now, as for this widely used assertion that this is the “most hated” bull market ever, let’s just look at the facts. Unlike opinions, they can’t simply be made up out of thin air:

1. The household asset share that is in the equity market, at over 32 per cent, has already taken out the 29 per cent bubble peak in 2007, and has only been exceeded once before and that was in the dotcom mania of the late 1990s. Only 3 per cent of the time in the past six decades has the equity exposure been this high.

2. The liquid asset ratio for U.S. equity portfolio managers is all the way down to historic lows of 2.7 per cent. They certainly aren’t bearish.

3. Net inflows to equity funds at the peak of the last two bull markets were $1.6 trillion, and it is true that net inflows this time since the cycle began have totalled $250 billion. Maybe this is what the so-called pundits are talking about. But then they fail to take into account all the ETF activity, which has totalled $2.4 trillion in the past nine years-plus. This then brings the cumulative participation by the retail investing public to a record $2.7 trillion. How can anyone forget ETFs??

4. Market Vane bullish sentiment is 61 per cent, and this is a ‘hated market rally’? You can’t be serious. In the AAII survey of retail investors, only 29 per cent are bearish — 36 per cent are bullish and the remaining 35 per cent are neutral. Where’s the hate?

5. In the just-released University of Michigan index, the mean expected probability of higher stock prices a year out came to 63 per cent. Only 3 per cent of the time in the past have households felt this good about the equity market outlook. No hate; love only.

6. If there is a hate on, it is on the bond market, where speculators have never before strapped on such a one-sided negative bet on prices. And in the August consumer sentiment survey published by the University of Michigan, 75 per cent said they are bearish on rates while a mere 4 per cent said they were bullish.

7. Gallup just did a poll of households and found that 55 per cent of them are participating in the stock market. So a slight majority certainly do not have anything close to a “hate” on for this rally.