Category: sentiment

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


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.

Greenspan sees no bubble

The Maestro’s crystal ball is the gift that keeps giving.  With an uncanny knack for completely missing most of the major inflections points in financial markets over the past five decades, Greenspan added this gem to his resume in a FOX Business News interview yesterday:

“There are a lot of things that can go wrong, but to say that the market is bubbly and in a position where it could conceivably create a serious problem, I think is overstating it.”

Let’s put this prediction in perspective by filling in some of his resume…

“It’s very rare that you can be as unqualifiedly bullish as you can now.”  ~ Alan Greenspan, The New York Times “Economic Survey”, January 7, 1973

1973 and 1974 turned out to be the worst years for economic growth and the stock market since the Great Depression.  (as noted in Jason Zweig’s commentary in The Intelligent Investor)

On October 2, 1990, then Federal Reserve chairman Greenspan made this prediction:

“At the moment it isn’t raining.  The economy has not yet slipped into a recession.”

It was later revealed that a recession had actually begun three months earlier, in July.

In April 2000 (one month after the NASDAQ peak), Greenspan was asked if rising rates would prick the stock market bubble.  His response:

“That presupposes I know that there is a bubble…  I don’t think we can know there’s a bubble until after the fact.”

From The Age of Turbulence (2007), Greenspan recounted his thoughts on the 2003-2006 housing bubble:

“I would tell audiences that we were facing not a bubble but a froth – lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy.”

The December 26, 2005 issue of BusinessWeek confirmed his complacency:

“The view of most economists, including Fed Chairman Alan Greenspan, is that a national home-price bust is highly unlikely.”

Greenspan also whistled past the subprime lending grave:

“With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . . As we reflect on the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means. . . . This fact underscores the importance of our roles as policymakers, researchers, bankers and consumer advocates in fostering constructive innovation that is both responsive to market demand and beneficial to consumers.”  ~ Alan Greenspan, from a speech given April 8, 2005

Housing prices peaked in Q1 2006 and by Q4 were in full retreat, yet Greenspan was unconcerned:

“Most of the negatives in housing are probably behind us.  The fourth quarter should be reasonably good, certainly better than the third quarter.”  ~ Alan Greenspan, October 26, 2006

Even as late as Q2 2008 he thought the worst was over:

U.S. financial markets, roiled by the collapse of the subprime-mortgage market, have shown a pronounced turnaround since March. The worst is over for the credit crisis, or will be soon, and there’s now a reduced possibility of a deep recession.  ~ Alan Greenspan, June 13, 2008

The S&P 500 plunged nearly 45% over the ensuing five months.

Alan Greenspan is a stark reminder that central bankers have only one productive use: as contrary indicators.

A bubble in talk of “no bubble”

It doesn’t matter how untrue a thing is. If enough people (especially people we look up to) repeat it often enough, it soon becomes conventional wisdom.  A hundred years ago, Gustave Le Bon understood this when he wrote his classic work on crowds. He realized that the popular mind wanted most of all to simplify things.  Le Bon called the process – by which an idea gets simplified, repeated, imitated, and spread by the crowd – contagion.  ~ Bill Bonner and Lila Rajiva, Mobs, Messiahs, and Markets (2007)

The contagion du jour is talk of “no bubble.”  For example, here are a few headlines just from this morning:

“If bubbles are out there these 10 sages will warn us” – MarketWatch

“Resistance is futile for staunch market bears” – MarketWatch

“Nasdaq tops 4000: why it’s nowhere near a bubble” – Yahoo!Finance

Here is what the experts have to say on the subject:

“Stocks are not selling at bubble levels, and, what do you diversify into? Do you want to diversify into cash? I think it’s a terrible investment compared to equities.  ~ Warren Buffett

“Stock prices have risen pretty robustly.  You would not see stock prices in territory that suggest…bubble-like conditions.”  ~ Janet Yellen

Of course, these are the same pied pipers who walked investors into the fire during the 2006-2007 credit bubble:

“Overall, the consumer is never going to sink the economy.”  ~ Warren Buffett, CNBC, May 7, 2007

“I’m waking up less at night than I was [over the slowdown in housing]. So far, there’s been remarkably little effect on the rest of the economy.”  ~ Janet Yellen, San Francisco Fed President, MarketWatch, February 21, 2007

In fact, at least one economist is so unconcerned about bubbles that he thinks they come with a silver lining:

“We may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest.”  ~ Paul Krugman

This is the same economist who was egging on the Fed to foment a housing bubble in 2002:

“Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”  ~ Paul Krugman, “Dubya’s Double Dip?,” The New York Times, August 2, 2002

Personally, we subscribe to the views of Marc Faber:

“I see a bubble in everything that relates to the financial sector.  We have a bubble in bonds. We have a bubble in low-quality bonds. We have a bubble in equities…We have a huge debt bubble and it’s only getting bigger, it’s not getting any smaller. So we are the bubble, everything that is in the financial sector is the bubble, and it’s been pumped up by central banks.”


On the edge of a precipice

This is a note sent to a like-minded colleague yesterday:

I think we are on the edge of the precipice, a combination of confidence, enthusiasm, selective euphoria, blind optimism, faith (in central bankers), and buy-the-dip mentality (any correction is healthy).  The Bernanke put is the hook.  Everyone fixated on the magical powers of the Fed, totally blind to the utter economic destruction going on.  No one is stopping to consider that stocks are long dated economically correlated assets… and that the economic foundation has been reduced to quicksand. There are signs of delusion everywhere.  Two of my favorites: cash on the sidelines and a wall of bearish sentiment for stocks to climb… patently absurd.

With a follow-up today:

Notice how the bulls are scratching their heads today.  How can the market go down with the economic reports relatively strong this morning and Uncle Ben assuring us that his economic experiment was a success?  They simply can’t fathom the opposite.

Bears feeling the pressure

During manias, the pressure to conform becomes… well, unbearable.  Yesterday, CNBC reported that noted bear Doug Kass put an end to the scorn he constantly received on Twitter:

Doug Kass has had it with the haters and declared his intent Monday to leave Twitter and his 62,000 followers behind.

He has been consistently bearish during the current market rally and has taken substantial heat for his position that stocks are overvalued and headed for a fall.

But he said he’s tired of the constant procession of personal attacks and is packing it in.

This reminds us of the pressure to conform during the housing and credit bubbles from 2004-2007.  Prominent bear Fred Hickey wrote the following in the October 4, 2007 issue of his monthly newsletter, The High-Tech Strategist:

Fellow contrarians, it’s gut-check time.  As a standard bearer of the camp that believes that the Federal Reserve is not omnipotent, I can tell you that this moment is as difficult as any that we have had to endure in many years.  I speak to many of the most hard-core stock market bears (our circle is a small one) and it is clear that their confidence is on the ropes.  I’m not sure if I can characterize it as despondency, but it sure is close.  I can hear the depression over the phone.  Their tone is subdued and there’s an air of despondency.

I’d be lying if I said I wasn’t feeling the pressure.

Someone left me a message this week whining that with the housing market in a total collapse, the Fed will never allow the stock market to fall because the consequences would be so awful.  It was his conclusion, therefore, that stocks were destined to go higher.  Resistance was futile.

It is the notion that the Federal Reserve is in complete control of the markets that is propelling this latest bout of insanity.

History doesn’t always repeat, though it often rhymes.  The near extinction of the bears is perhaps the best sign that the investment winds are about to change as the Fed-induced economic storm clouds build.

Bring in the clowns

On May 3rd the DJIA hit 15,000 for the first time.  Right on cue, Ralph “Make ’em Poorer” Acampora predicted Dow 20,000 by 2017 on CNBC in an interview with Maria Bartiromo.  She heaped praise on Acampora’s recent bullish prognostications while conveniently hitting the delete key on his past, which included this blooper from the top of the credit bubble on July 18, 2007 (also on CNBC):

“I’m predicting Dow 21,000 by 2011. It’s only 40% from here [actually 51%, but who’s counting]. It’s a lay-up.” When asked about recent credit jitters, he responded, “Bad news is good news; never fight the tape.”

Rydex traders most bullish since 2000 tech bubble

The Rydex mutual fund complex, which caters to market timers with a full lineup of bull, bear and sector funds, is showing near record levels of bullishness these days.  The Rydex Money Market Fund has dwindled to $737 million in assets, its lowest level in over 12 years.  Bull and bear funds show a mix of 88.4% in the bull camp and 11.6% in the bear camp, their highest level of exuberance since February, 2001.

Bearish sentiment at extreme lows.

 Rydex MMF assets

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