Category: contrary indicators

6 reasons why an equity bear market has begun

Market leadership

Out of 35 country stock markets, just four are up this year, led by the Norway and the U.S.  Thirteen are down by double digits.  China and India, which account for 18% of the world’s GDP, are -15.4% and -20.7% respectively.  Even within the U.S., fewer and fewer stocks are participating.  According to Delta Investment Management, just 50.8% of 3,600 stocks are in uptrends, even though the S&P 500 is up 13.1% over the past 12 months and just 1.5% below its all-time high.


Investor sentiment

Sentiment has rebounded from the whiff of pessimism created by the February-March selloff to levels of extreme bullishness.  Sampling our 10 favorite sentiment indicators, the median reading is in the 90th percentile of bullishness.


Bullishness Percentiles

Indicator 10-YearBearish








Date ofRecent


S&P 500 2901.61 10/4/18
VIX 59.93 9.14 12.12 85th 9/28/18
3-Month VIX 48.90 13.00 15.75 87th 9/28/18
Investors IntelligenceBulls – Bears -26.4% +54.0% +42.3% 92nd 9/21/18
Consensus, Inc.Bulls 18% 78% 69% 68th 9/21/18
AAII Cash Allocation 44.8% 13.0% 16.0% 84th 9/30/18
NAAIM Equity Exposure Index (Median) 0% +100.0% +82.5% 59th 10/3/18
MMF / Mutual Fund + ETF Assets 41.0% 12.2% 12.4% 99th 8/31/18
Mutual FundCash Levels 4.1% 2.9% 3.0% 94th 8/31/18
Rydex Bear Fund Assets / Total Assets 59.2% 3.4% 4.8% 96th 10/3/18
Rydex MMF / Bull +Sector Fund Assets 98.6% 6.8% 7.1% 93rd 10/3/18

Sources: Investors Intelligence, Consensus, Inc., American Association of Individual Investors, National Association of Active Investment Managers, Investment Company Institute, Guggenheim Investments, Bearing Asset Management


Interest rates

Interest costs on the $21 trillion federal debt have doubled since the 2016 election as we move closer to trillion dollar budget deficits.  The 30-year Treasury bond yields 3.38%, a 4-year high.  The 10-year yields 3.23%, its highest level since 2011.  Cash (using 2-year T-bills as a proxy) is the most competitive with stocks since late 2007.



The world’s central banks have been cutting back on quantitative easing.  The Federal Reserve has contracted its balance sheet 5.0% the past 12 months.  Combined, the Fed, Bank of Japan and ECB will no longer be adding liquidity by the end of the year.



Stocks are priced for perfection and investors are positioned as if the record 10-year bull market will go on indefinitely.  Retail investors cash levels, from TD Ameritrade to Schwab, are at all-time lows.



Since 2009 total worldwide debt increased by over 40%.  Within the U.S., since the end of 2008 student loan debt is up 127%, auto loan debt 57%, corporate debt 76%, and public debt 98%.  Margin debt has more than tripled.  There is currently $8 trillion in dollar-denominated debt outside the U.S. and currencies in 20 countries have declined by double digits against the U.S. dollar.  In other words, their interest costs are rising.  We’re already seeing cracks appear in countries like Argentina, Turkey and South Africa.  To this fragile situation, President Trump is risking a trade war.  Never a good idea, but the timing couldn’t be worse…


7th Reason

It’s October…

Is new ETF to track ETF industry another sign of an ETF bubble?

Burton Malkiel, early influence (along with Eugene Fama) on Vanguard founder and indexing pioneer John Bogle, has been hired to join the investment committee of the Tosoro ETF Industry Index.  This index guides the ETF Industry Exposure & Financial Services ETF (TETF) recently unveiled on June 26th.

Adding irony to the launch, there appear to be flaws with index construction, not uncommon for ETFs.  The companies in Tier A, which make up 50% of the index and have “direct financial impact” from the ETF industry, are equal-weighted.  That means BlackRock (BLK), with a $71 bil market cap, has the same weight (6.25%) as Wisdom Tree Investments (WETF) with a $1.43 bil market cap.

One dirty little secret of the ETF industry is that there is no such thing as a “passive” index.  Otherwise, why the need to hire an investment committee to decide components and weightings?  The timing of a new ETF is another matter, and almost always a backward look on performance and forward look on what will entice investors.  These are not impartial decisions made by machines, but value judgements made by humans.  Value, as any Austrian economist knows, is always subjective.

Predictions for 2017

Those who have knowledge don’t predict. Those who predict don’t have knowledge.” ~ Lao Tzu, 6th century BC poet and father of Taoism

It appears Lao Tzu anticipated the accuracy of our 2016 predictions twenty seven centuries ago.  While we got a few right (rebound in gold mining and Brazilian stocks, the demise of Valeant Pharmaceuticals, and 50/50 chance Trump would be the next president), we got plenty wrong, most notably a 25% bear market in stocks.

Bloodied, but unbowed, here is our short list for 2017:

1) The Trump honeymoon is short-lived, doomed by absurdly high expectations, faulty economics and political expediency.

– positives: Sanctions against Russia end as the Cold War thaws.  Regulations are cut, especially in the energy sector.  U.S. corporate tax rate is cut to 25%, bringing it more in line globally.

– negatives: Obamacare is not repealed, but instead replaced with a watered down version, dubbed “Trump Care.”  The debt ceiling is raised in March and federal spending continues to grow unchecked, even adjusted for inflation and population growth.  Trade tensions increase.  Common Core is not repealed.

2) Global economy officially enters recession.  China, the Euro Zone and U.S. all join the fray.

3) Global backlash against the political establishment continues.  Populist parties do especially well in Europe.  French, German and Italian bonds suffer.  Heading into 2018, a breakup of the EU looks like a serious possibility.

4) Most global equity markets enter bear market territory.  The S&P 500 ends the year down over 20% (below 1800).

– worst performers: financials (global banks, investment banks, auto finance, bond insurers), REITs (retail and office), technology, industrials, Chinese financials

– best performers: discount retailing (Wal-Mart, Dollar Tree), food-related, fertilizer, genomic sequencing (Illumina), cancer drugs (Bristol Myers)

5) Inflation begins to become a concern.  Gold and gold mining stocks do very well.

6) U.S. dollar peaks, losing ground to the Swiss franc, euro, British pound and Japanese yen.

7) China cracks widen.  Bonds extend losses.  Equities fall over 20%.  Yuan experiences at least one official devaluation, even though the Chinese sell over $200 billion in U.S. Treasuries to shore up their currency.  Trump cries fowl, labeling China a “currency manipulator.”

8) Official U.S. deficit for fiscal year ended 6/30/17 exceeds $600 billion.  Talk of future trillion dollar deficits becomes more commonplace.

9) Active investing makes a comeback.  BlackRock is a notable underperformer.

10) Global free market reforms are a mixed bag.  Brazil makes progress, India regresses.

Venture capital and IPO markets open full tap

Venture capitalists raised $17.5 billion in Q2, the most since the tech bubble top in 2000 according to a survey by PricewaterhouseCoopers and the National Venture Capital Association.  This was 30% higher than Q1.

There were 34 initial public offerings (IPOs) in June, the highest June total since 2000.  The biotechnology space is white hot.  Nearly 30% of the 109 IPOs year-to-date were biotech outfits, easily outpacing the 12% in 2000.  Reminiscent of the dot-com craze 15 years ago when the quality of IPOs fell off a table, more biotech companies are coming public at an earlier stage of development.  Aeglea BioTherapeutics, for example, is seeking to raise $86 million even though its primary drug hasn’t started early-stage trials.  According to Mark Arbeter, 78% of companies going public the past 6 months are losing money, exceeded the peak in 2000.  Big first day moves are another reminder of the tech bubble.  On June 29, Seres Therapeutics popped 186%.  Just last week, cybersecurity firm Rapid7 popped 52% on its debut while cancer drug developer ProNai Therapeutics soared 81%.



Latest fad: buy the dip

Now that the S&P 500 has had all of a 3.4% correction, rationalizations for dip buying are coming out of the woodwork.  E.g., the latest headline from Yahoo Finance: “Fear not. The VIX is flashing a buy sign.”  Seriously?

VIX - 140805


There are better indicators of bullishness:

Rydex bear fund assets


“Spikes in the VIX tend to indicate heightened investor fear,” said Ari Wald, head of technical analysis at Oppenheimer. “From a contrarian standpoint we use that as ‘buy’ signals, and the numbers agree.”

We wholeheartedly disagree.  Investment professionals have adopted the Orwellian logic that up is down, black is white, stimulus is sustainable, and bravado is fear.  The true contrarian position is to raise cash, get short, and fasten the seat belt.

Addendum: Recent quotes from some of our favorite talking heads:

This is not a weak economy, it’s a pleasantly strong economy.  This is a nicely strengthening economy.  This is a very well demeanored economy.  It’s not an excited one.  It’s one that’s doing quietly better…  Let’s all be calm and not be panicked at this point.  I turned from being quite bullish of stocks to being neutral early last week and I have to tell you, I never thought we’d see the market fall several hundred Dow points in the course of three or four days.  I got very lucky, and I’m going to turn back to being bullish again.

~ Dennis Gartman, as appeared on CNBC, August 4, 2014

Tony Dwyer


Where are the ominous headlines?

Biotech Index - 140413


The momentum stock bubble burst last week, with highflying stocks showing significant declines from their February/March highs:

  • brokerage stocks: -10.8% (high set on March 20)
  • housing stocks: -9.4% (February 27)
  • Internet stocks: -17.1% (March 4)
  • biotechnology stocks: -21.1% (February 25)
  • Tesla Motors: -20.0% (March 4)
  • Netflix: -28.2% (March 4)
  • Twitter: -45.4% (December 26)
  • 3D Systems: -50.1% (January 3)

Yet a brief scanning of the financial headlines shows little concern:

  • – “Stocks fall as volume rises, but here’s why not to worry”
  • The Wall Street Journal – “Stock-Market Jitters Put Investors at Ease; Recent Turbulence Is Seen as a Healthy Sign”
  • CNBC – “Last week’s big selloff ‘probably over': Pro”
  • – “Don’t let these stock market gyrations scare you; It’s likely that we’ve seen the end of recent declines”

The common theme among pundits is that the momentum bust is isolated, contained, healthy, and even predictable.  CNBC quoted Jonathan Golub, chief U.S. market strategist at RBC Capital:

“I think the selloff is probably over.  If you look at the economically sensitive stuff in the market, it’s not really selling off. It’s tech. It’s bio-tech [which makes up about 10 percent of the market.]  The other 85 to 90 percent is in perfectly fine shape.

This weekend Barron’s patted itself on the back for predicting the tech bust several months ago:

In November, when pundits began to natter about a stock market bubble, we pointed out in a prescient cover story that it was a tech bubble, not a market bubble.  Our advice has paid off handsomely.

Barron’s quoted perma-bull Jim Paulsen, chief investment strategist at Wells Capital Management:

My guess here is that we’re having a valuation adjustment in one small part of the market, in the highflying momentum stocks that got ahead of themselves and are now correcting.  I think this is more of a buying opportunity.

The article concluded:

All this suggests that despite some ominous headlines, the stock market’s health is still good. [emphasis added]

Where are the ominous headlines?  We don’t see any.  We see complacency as far as the eye can see with the assuredness that the momentum stock bust is “contained.”  We heard these same words in April, 2000 after the dot-com bust and March, 2007 after the subprime bust… early warning signs that were overwhelmingly ignored.



Barbarians at the trough

“Activist investors” have become momentum chasers, another example of how far the market has untethered from reality.  Is Time magazine tempting the investment gods with this cover?



Bullish investor sentiment continues to set records

Doug Wakefield of Best Minds Inc. just made the following insightful comment about unprecedented levels of investor optimism:

One of my sources is where Jason Goepfert pulls together several dozen indicators on an ongoing basis.  All year he would rarely make a comment that would signal a “bull” or “bear” indicator that would go on his general list of “bulls” and “bears” worthy of notice. In fact, as of the Sept 18th “no taper yet” announcement, there were only 4 indicators that had made the list for the year (both bulls and bears for stocks).

However, since that time, the pace and number has picked up to the point that where there have been 13 bear posts since Sept 18th against only one bull post.  All of these a major indicators are very rare, or highest ever.

One of my favorites for a full blown mania, is a recently reported figure of 21 dollars in double long NASDAQ funds at Rydex for every 1 dollar in double inverse NASDAQ funds. Of course, another record.

Below are several snippets from the daily emails of over the past five weeks:

Oct 31

  • Active investment managers have added to their exposure to stocks and are now carrying among their heaviest loads in 7 years.
  • As an update to Wednesday’s report, the Rydex Total Index Bull / Bear Ratio hit 5.0 as of that day’s close.  It is now equivalent to the levels seen at the past three market corrections.
  • According to Lipper, investors have contributed a net $41 billion to equity mutual and exchange traded funds over the past three weeks.  Going back to 2002, that exceeds the prior 3-week record inflow by more than 17%.

Nov 4

  • Safety-seeking behavior among traders in a popular mutual fund family (Rydex Funds) has just dropped to a 12-year low.

Nov 5

  • Trading in penny stocks, the Wild West of the stock market, jumped higher in October, more than 50% above September’s levels.

Nov 6

  • The spread between Smart Money and Dumb Money has reached a troubling extreme.  The last three times we saw such a divergence, stocks peaked quickly.
  • Traders and investors appear to be very comfortable trading individual stocks as opposed to “safer” exchange-traded funds.  The Liquidity Premium, particularly for the Nasdaq 100, has reached the 2nd-most-extreme level since 2002.  It was only higher in mid-August 2012 and nearly this extreme in early March 2011, both preceding corrections.  Stocks usually do quite a bit better when investors aren’t quite so complacent in their trading activity.

Nov 7

  • Speculative activity has increased sharply, particularly when looking at indicators focused on the tech-heavy Nasdaq 100 index.

Nov 8

  • Buying climaxes among stocks in the S&P 500 have added up to more than 125 during the past three weeks, one of the highest totals in 20 years.
  • We touched on speculators’ positions in the Nasdaq 100 futures on Thursday, and the latest data from the Commitments of Traders report confirmed that they got even more net long this week, to a new all-time record degree.
  • According to Bloomberg data, the skew on options for the S&P 500 tracking fund, SPY, has dropped to its lowest level since at least 2005, the earliest for which data is available.  While there are many possible structural reasons for this involving arcane options trading strategies, the knee-jerk interpretation is that traders have decided to pay up greatly for call options, betting on a further market rally.  This has a consistent history of being a contrary indicator, which would suggest that this is market-negative.

Nov 15

  • This is the 3rd time since 1997 that the S&P rose at least 0.4% to a 52-week high but with less than 2/3 of stocks rising on the day for three days in a row.  The others were 10/6/97, 3/23/00 and 11/22/05, all preceding short-term corrections.  Historically, it marked market peaks in 1950, 1955, 1959, 1968, 1975 and 1980, with an overall return over the next three weeks that averaged -1.0% with 41% of days showing a positive return.

Nov 19

  • The SKEW Index from the Chicago Board Options Exchange jumped to 137 on Monday, which is one of the highest readings in history.  It suggests an approximately 12% probability of a “black swan” event – a rapid, 2-standard-deviation market move – within 30 days.

Dec 2

  • Investment managers have never been this exposed to the stock market, this aggressively (at least since 2006).
  • We looked at a moving average of the Options Speculation Index on November 19th, and it was nearing all-time highs.  The weekly reading last week jumped to 131%, tied for the 2nd-highest level of speculation among options traders in 13 years.
  • The latest Commitments of Traders report shows that speculators have been pushing short-side bets on precious metals.  Total speculator positions in gold, silver, copper, platinum and palladium are nearing decade-long lows, second only to several weeks in late June and early July.

Dec 3

  • Traders in the Rydex family of mutual funds have moved to a new level of speculation in the major index funds.  With $5.30 riding on bullish funds for every $1.00 in bearish funds, they’ve never been more exposed.

Dec 4

  • Assets in equity mutual funds and ETFs have now eclipsed assets lingering in safe money markets by a ratio of 3.7-to-1, a three-decade record.
  • The Rydex bull / bear ratio mentioned in Tuesday’s report climbed even further on Tuesday, now with another new all-time high reading of 5.5.  In the Nasdaq 100, there is now nearly $21 invested in the leveraged long fund for every $1 in the leveraged inverse fund.

“Unprecedented” levels of bullishness is an understatement.

Investors Intelligence poll shows most bullishness since 1987

The granddaddy of sentiment indicators is the weekly Investors Intelligence poll which grades investment newsletters as bullish, bearish or neutral.  Latest reading: 57.1% bulls vs. 14.3% bears.  The ratio of bulls/bears, at 3.99, is the highest since early 1987.  Prior to the ’87 Crash the ratio peaked at 3.48 on August 14, 1987 (less than 1% off the year’s high).  Two months later the S&P 500 had plunged 33%.

"Buy high, sell low"

“Buy high, sell low”

Rydex timers most bullish since 2000 tech bubble

As of the close last Friday, just 9.8% of assets in Rydex bull and bear funds bet on the downside (weighted for leverage).  This is the highest level of bullishness since January 30, 2001.

WordPress Themes