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
Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
One Response to “The Stock Market – Shades of Early 2000?”
Most read in the last 20 days:
- How the Welfare State Dies
Hollande Threatens to Ban Protests Brexit has diverted attention from another little drama playing out in Europe. As of the time of writing, if you Google “Hollande threatens to ban protests” or variations thereof, you will find Russian, South African and even Iranian press reports on the topic. Otherwise, it's basically crickets (sole exception: Politico). Gee, we wonder why? They don't like him anymore: 120.000 protesters recently turned Paris into a war zone. All...
- Free Speech Under Attack
Offending People Left and Right Bill Bonner, whose Diaries we republish here, is well-known for being an equal opportunity offender - meaning that political affiliation, gender, age, or any other defining characteristics won't save worthy targets from getting offended. As far as we are concerned, we generally try not to be unnecessarily rude to people, but occasionally giving offense is not exactly beneath us either. The motto of the equal opportunity...
- Toward Freedom: Will The UK Write History?
Mutating Promises We are less than one week away from the EU referendum, the moment when the British people will be called upon to make a historic decision – will they vote to “Brexit” or to “Bremain”? Both camps have been going at each other with fierce campaigns to tilt the vote in their direction, but according to the latest polls, with the “Leave” camp’s latest surge still within the margin of error, the outcome is too close to call. The battle lines are...
- A Market Ready to Blow and the Flag of the Conquerors
Bold Prediction MICHAELS, Maryland – The flag in front of our hotel flies at half-mast. The little town of St. Michaels is a tourist and conference destination on the Chesapeake Bay. It is far from Orlando, and even farther from Daesh (a.k.a. ISIL) and the Mideast. St. Michaels, Maryland – the town that fooled the British (they say, today). Photo credit: Fletcher6 Out on the river, a sleek sailboat, with lacquered wood trim, glides by, making hardly a...
- Going... Going... Gone! The EU Begins to Splinter
Dark Social Mood Tsunami Washes Ashore Early this morning one might have been forgiven for thinking that Japan had probably just been hit by another tsunami. The Nikkei was down 1,300 points, the yen briefly soared above par. Gold had intermittently gained 100 smackers – if memory serves, the biggest nominal intra-day gain ever recorded (with the possible exception of one or two days in early 1980). Here is a picture of Haruhiko Kuroda in front of his Bloomberg monitor this...
- Rule Britannia
A Glorious Day What a glorious day for Britain and anyone among you who continues to believe in the ideas of liberty, freedom, and sovereign democratic rule. The British people have cast their vote and I have never ever felt so relieved about having been wrong. Against all expectations, the leave camp somehow managed to push the referendum across the center line, with 51.9% of voters counted electing to leave the European Union. Waving good-bye to...
- What Could Possibly Go Wrong?
A Convocation Of Gamblers The Wall Street Journal and BloombergView have just run articles on the shadow banking system in China. This has put me in a nostalgic mood. About 35 years ago when I was living in Japan, I made a side trip to Hong Kong. Asia's Sin City, Macau Photo credit: Nattee Chalermtiragool I took the hydrofoil to Macau one afternoon and the same service back early the next morning. On the morning trip, I am sure that I saw many of the...
- The Problem with Corporate Debt
Taking Off Like a Rocket There are actually two problems with corporate debt. One is that there is too much of it... the other is that a lot of it appears to be going sour. Harvey had a good time in recent years...well, not so much between mid 2014 and early 2016, but happy days are here again! Cartoon by Frank Modell As a brief report at Marketwatch last week (widely ignored as far as we are aware) informs us: “Businesses racked up debt in the...
- A Darwin Award for Capital Allocation
Beyond Human Capacity Distilling down and projecting out the economy’s limitless spectrum of interrelationships is near impossible to do with any regular accuracy. The inputs are too vast. The relationships are too erratic. The economy - complex and ever-changing interrelations. Image credit: Andrea Dionne Quite frankly, keeping tabs on it all is beyond human capacity. This also goes for the federal government. Even with all their data gatherers and...
- Janet Yellen’s $200-Trillion Debt Problem
Blame “Brexit” BALTIMORE – The U.S. stock market broke its losing streak on Thursday [and even more so on Monday, ed.]. After five straight losing sessions, the Dow eked out a 92-point gain. The financial media didn’t know what to say about it. So, we ended up with the typical inanities, myths, and claptrap. “Investors” are pushing the DJIA back up again..apparently any excuse will do at the moment. The idea may backfire though, as exactly the same thing happened...
- Gold and Brexit
Going Up for the Wrong Reason Gold is soaring. It should—and a lot—but in my view not for the reason it is. Indeed gold is insurance for uncertain times, a time that Brexit seems to represent. But insurance is an administrative cost — one must minimize its use. August gold contract, daily – gold has been strong of late, but this seems to be driven by “Brexit” fears - click to enlarge. Moreover, insuring against Brexit might ironically be equivalent...
- The Fed’s Doomsday Device
Bezzle BALTIMORE – Barron’s, in a lather, says the market is facing the “Two Horsemen of the Apocalypse.” Huh? Only two? There were four last time! Supposedly, the so-called Brexit – the vote in Britain this Thursday on whether to leave or remain in the European Union (EU) – and uncertainty over where the Fed will take U.S. interest rates are cutting down stocks faster than a Z-turn mower. But Brexit is a side show. As our contacts in London...