The Most Speculative Sectors Are Going Wild
Yours truly remembers late 1999/early 2000 well. It was a time that could be best described as 'waiting for the tech crash'. One of the most striking features of the final blow-off surge of the tech mania was its sheer size (the final legs up in the 1920's bubble and the Nikkei bubble of the 1980s were far more subdued by comparison). However, what was even more fascinating was how thoroughly caution was thrown out of the window. Completely worthless paper started to rise, just as long as it could be argued that it had remotely to do with technology. The stories became ever more fantastic as time went on ('superconductor stocks', 'space stocks', you name it). The action finally moved into OTC BB listed and pink sheet stocks, the 'micro-cap' names, most of which no-one had ever heard before. Day traders (a large population at the time) took notice and began to scour the charts of these stocks for 'pretty looking' formations that may result in break-out moves. And rightly so, since many such moves did in fact happen, even if the underlying companies had never produced a red cent in earnings or revenues, and had no realistic hope of ever doing so. These days one no longer needs to expose oneself to the 'company specific risk' of micro-caps. Today there is an ETF for everything. Guess which one has just 'gone vertical'.
Of course one must admit that the action these days is different from the full-blown mania of 2000, which was a near perfect reenactment of 1929 in terms of surging public participation and wildly bullish sentiment. Nowadays, even with the indexes at new highs, there is an undertone to the proceedings that feels different. The public is no longer mesmerized by stocks and the get-rich-quick mentality has definitely expired. These days it is mostly professionals bidding stocks up in the hope of greater fools letting them out 'when the time comes' (if all of them realize in real time when that dreaded day arrives, the market will of course go 'no bid'). All in all, it feels more 1937nish than 1929nish.
The micro-caps are accompanied in their manic surge by small cap indexes like the Russell 2000. Usually, outperformance by the Russell 2000 index is considered bullish, and most of the time rightly so. But one must not lose sight of the fact that when such outperformance becomes extreme, it can also constitute a warning sign (just as the normally bullish outperformance of the Nasdaq index constituted one in early 2000).
One reason to continue to look a bit askance at this extremely strong performance is the fact that speculators in stock index futures hold their by far greatest net long exposure in precisely this riskiest market sector. In the large and mini Russell contracts combined, this exposure has grown to a record value of $27 billion, by far the largest of any stock index futures contract.
A chart of the commitments of traders in Russell 2000 futures (big contract). The value of the total net speculative long position in large and mini Russell 2000 futures combined has reached a new record high of nearly $27 billion – click to enlarge.
Sentiment surveys generally show an amount of giddiness appropriate to the price action, but what may be more important than this fact is that there exist now both short and long term divergences with prices.
First a look at a short term divergence, between the AAII bull-bear ratio and the S&P 500 Index:
A longer term sentiment divergence can be (inter alia) seen in the Market Vane bullish consensus. Here we compare the 2007 situation to today's:
More Technical Divergences
When looking at the SPX, we were struck by two facts: for one thing, there is now a price/momentum divergence in place as a result of the recent brief correction. What may be more important though is that there is a divergence between the SPX and the strongest stock index in Europe, Germany's DAX. Of course all these divergences may still be erased, but they certainly are a 'heads up' one would do well not to ignore.
S&P 500 Index: momentum divergences and a divergence with the DAX index (the green line below volume) – click to enlarge.
Of course, none of this may matter – as our friend B.C. reminded us today, the SPX and the monetary base continue to track each other very closely, and as we all know, the monetary base is set to continue to rise for months to come.
However, as John Hussman has pointed out a little while ago, there is at least one data series that correlates even better with the US monetary base: the price of beer in Iceland. Correlation does not always mean causation.
And slightly off topic, in the context of odd correlations, we would be remiss not to tell our readers about this chart recently posted by '' on twitter. Finally we learn the true reason about global warming: it's not the fault of too much CO2 in the atmosphere, it is too much debt relative to GDP that is the culprit.
In our last update we pointed out that there were good reasons to be on alert for the possibility that a distribution pattern may be put in place. Since slight new highs have been made since then, no typical distribution pattern has formed yet (and the question whether a major peak has already been seen has been answered in the negative).
Nevertheless, the idea that we could at the very least be on the cusp of a bigger correction has actually been strengthened in light of the above. Especially the blow-off moves in the most speculative market sectors and the divergence between SPX and DAX strike us as important factoids in this context (recall also the previously discussed SPX/emerging markets divergence; it is the fact that divergences are showing up with very high frequency recently that is especially concerning). These are phenomena frequently observed prior to major trend reversals.
Charts by: StockCharts, Sentimentrader, B.C., Not-Jim-Cramer
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
One Response to “The Stock Market – Shades of Early 2000?”
Most read in the last 20 days:
- Insanity, Oddities and Dark Clouds in Credit-Land
Insanity Rules Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn't matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more. The perfect investment for modern times: interest-free risk! Illuustration by Howard...
- US Economy – Something is not Right
Another Strong Payrolls Report – is it Meaningful? This morning the punters in the casino were cheered up by yet another strong payrolls report, the second in a row. Leaving aside the fact that it will be revised out of all recognition when all is said and done, does it actually mean the economy is strong? Quo vadis, economy? Image credit: Paul Raphaelson As we usually point out at this juncture: apart from the problem that US labor force participation has...
- Investing in Gold in 2016: Global Paradigm Shifts in Politics and Markets
Crumbling Stability In the past few months, we have witnessed a series of defining events in modern political history, with Britain’s vote to exit the EU, (several) terror attacks in France and Germany, as well as the recent attempted military coup in Europe’s backyard, Turkey. Global stability continues to be undermined Uncertainty over Europe’s political stability and the future of the EU keeps growing. These worries are quite valid, as geopolitical...
- Trump's Tax Plan, Clinton Corruption and Mainstream Media Propaganda
Fake Money, Fake Capital OUZILLY, France – Little change in the markets on Monday. We are in the middle of vacation season. Who wants to think too much about the stock market? Not us! Yesterday, Republican presidential candidate Donald Trump promised to reform the U.S. tax system. This should actually even appeal to supporters of Bernie Sanders: the lowest income groups will be completely exempt from income and capital gains taxes under Trump's plan. We expect to hear...
- The Great Stock Market Swindle
Short Circuited Feedback Loops Finding and filling gaps in the market is one avenue for entrepreneurial success. Obviously, the first to tap into an unmet consumer demand can unlock massive profits. But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven. Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic...
- Bank of England QE and the Imaginary “Brexit Shock”
Mark Carney, Wrecking Ball For reasons we cannot even begin to fathom, Mark Carney is considered a “superstar” among central bankers. Presumably this was one of the reasons why the British government helped him to execute a well-timed exit from the Bank of Canada by hiring him to head the Bank of England (well-timed because he disappeared from Canada with its bubble economy seemingly still intact, leaving his successor to take the blame). This is how Mark Carney is seen by...
- Why Americans Get Poorer
Secular Stagnation OUZILLY, France – Both our daughters have now arrived at our place in the French countryside. One brought a grandson, James, now 14 months old. He walks along unsteadily, big blue eyes studying everything around him. Put to sleep by monetary lullaby! This is what children look like approximately five minutes into a rant on the Fed's policy mistakes. It never fails! Photo credit: Jack Weid He adjusted quickly to the change in time zones. And...
- An Old Friend Returns
A Rare Apparition An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here. Hello, old friend. Professor X and Magneto staring each other down in the plastic...
- The Fabian Society and the Gradual Rise of Statist Socialism
The “Third Way” “Stealth, intrigue, subversion, and the deception of never calling socialism by its right name” – George Bernard Shaw An emblem of the Fabian Society: a wolf in sheep's clothing The Brexit referendum has revealed the existence of a deep polarization in British politics. Apart from the public faces of the opposing campaigns, there were however also undisclosed parties with a vested interest which few people have heard about. And...
- Retail Snails
Second Half Recovery Dented by “Resurgent Consumer” We normally don't comment in real time on individual economic data releases. Generally we believe it makes more sense to occasionally look at a bigger picture overview, once at least some of the inevitable revisions have been made. The update we posted last week (“US Economy, Something is Not Right”) is an example. Eager consumers storming a store Photo credit: Daniel Acker / Bloomberg We'll make an...
- The Fed’s “Waterloo” Moment
Corrupt and Unsustainable James has been a big help. Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories – full of grotesque monsters... evil maniacs... and events that couldn’t possibly be true (catch up here and here). He turned his head until his gaze came to rest on the barred windows of the main building. Finally, he spoke; as far as I was aware these were the first words he had uttered in more than five years....
- Good Money and Bad Money
Confidence Gets a Boost OUZILLY, France – Last week’s U.S. jobs report came in better than expected. Stocks rose to new records. As we laid out recently, a better jobs picture should lead the Fed to raise rates. This should cause canny investors to dump stocks. Canny investors at work (an old, but good one...) Cartoon via Pension Pulse But the stock market paid no attention. It follows logic of its own. Headlines told us that last Friday’s report “boosted...