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
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add 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:
- Gold Sector Update – What Stance is Appropriate?
The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
- Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
- Trump and the Draining of the Swamp
Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
- Gold and Silver Divergence – Precious Metals Supply and Demand
Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
- When Trumponomics Meets Abenomics
Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway] Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
- The Great Wailing
Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations. Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any... You’d think Washington had been invaded by Goths, now...
- Receive a One Percent Gift When Buying or Selling a Home
How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine. Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell. The people who took this photograph probably want to...
- Unleashing Wall Street
To Unleash or Not to Unleash, That is the Question... LOVINGSTON, VIRGINIA – Corporate earnings have been going down for nearly three years. They are now about 10% below the level set in the late summer of 2014. Why should stocks be so expensive? Example of something that one should better not unleash. The probability that a win-lose proposition will develop upon meeting it seems high. It wins, because it gets to eat... Image credit: Urs Hagen Oh,...
- Silver Futures Market Assistance – Precious Metals Supply and Demand
Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday. Taking off for real or not? Photo credit: NASA Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...
- Boondoggles for the Swamp Critters
Monster or Mozart? BALTIMORE – Investors seem to be holding their breath, like a man hiding a cigarette from his wife. It’s just a feeling, and it’s not the first time we’ve had it... but it feels as though it wouldn’t take much to send them all running. Actually, they're not going anywhere yet... but there is a lot of overconfidence by those who were very worried when prices were a lot better - click to enlarge. Meanwhile... we’re coming to a deep...
- The Art and Pseudoscience of Monetary Policy
Definitely Maybe Everyone’s got a plan for sale these days. In fact, there are so many plans out there we cannot keep up with them all. Eat celery sticks and lose weight. Think and grow rich. Stocks for the long run. Naturally, plans like these run a dime a dozen. All social engineers who get to impose their harebrained schemes on the rest of the world through the coercive powers of the State, as well as all armchair planners regaling us with their allegedly...
- California, Nestle and Decentralization
Goodbye, Socialist Paradise Nestle USA has announced that it will move its headquarters from Glendale, California, to Rosslyn, Virginia, taking with it about 1200 jobs. The once Golden State has lost some 1690 businesses since 2008 and a net outflow of a million of mostly middle-class people from the state from 2004 to 2013 due to its onerous tax rates, the oppressive regulatory burden, and the genuine kookiness which pervades among its ruling elites.* There has been a...