Excessive Optimism, but Money Supply Growth Rate Remains High

We recently remarked on the astonishing levels of optimism currently visible in the stock market. The present phase of excessive optimism has lasted for quite a long time already and has recently begun to once again approach the all time records seen in several indicators at the end of 2013. As we already mentioned on occasion of the last update, there is at least one 'good' reason for traders to be optimistic, and that is the fact that many charts of individual stocks and sectors look bullish (there have been a number of noteworthy break-outs lately, as one would expect).

However, the problem with good-looking charts is that they only look good until they don't anymore, so one has to keep an eye on market sentiment and the money supply. In summary the situation is that the market's underlying technical condition (apart from being overbought) still looks positive, sentiment is at absolute nosebleed levels and giving us a big warning sign, and money supply growth remains strong enough to continue to lend support to the market. The caveat to the latter remark is that y/y money supply growth has halved from its peak, and we cannot know with certainty where the 'bust threshold' will turn out to be this time.

First a chart from sentimentrader, the “smart/dumb money confidence spread” – which measures differences in market exposures of the two classes of traders. The definition essentially regards anti-cyclical market participants as 'smart' and pro-cyclical traders as 'dumb'. This doesn't mean that the former are always right – in fact, they very often aren't right for long stretches of time. However, they will as a rule be right at extremes.

 

 

smart-dumb-spreadCurrently the confidence spread is at -0.42, with 'dumb money confidence' in a continuation of the rally at 71% and 'smart money confidence' at 29% – this is pretty much as bad as it gets – click to enlarge.

 

Next an update of the chart of various Rydex asset aggregates and ratios we have shown previously:

 

Rydex-assets-the maniaThe mania in all its glory – here we have a series of data that have already eclipsed the manic peaks seen at the end of the tech mania in 2000. The contrast of trader opinions at the 2009 lows to today is striking. When the best time to buy had arrived, there was a broad consensus that the market would go lower. Now there is a record amount of money in Rydex funds betting that the market can only go higher from here. The extent of the capitulation of bears and holders of cash is especially noteworthy – click to enlarge.

 

Next an update of the “risk appetite index”, which is an amalgam of the risk appetite indexes created by three different banks. The exact definition can be seen here.

 

risk indexThe 'risk index' remains very elevated, but not as high as it was earlier this year. This is actually a subtle warning sign – click to enlarge.

 

A chart of the NAAIM exposure index shows a similar subtle deterioration. It is at an extremely high level, but not as high as it was in late 2013.

 

NAAIM-1This index measures the average net exposure of fund managers participating in the NAAIM survey. Responses can range from '200% long' to '200% short'. The latest value of 88.2 is very high, but represents a subtle deterioration from the 100% and higher all time record net long exposures seen on three occasions last year – click to enlarge.

 

Next an update of equity and OEX put-call ratios and the VIX. Since the last update, there has been a second notable spike in the one-day OEX p-c ratio (this ratio is considered a 'smart money' indicator, while the equity p-c volume ratio is held to be a contrary indicator).

 

pc-ratios updateEquity and OEX one day volume ratios and the VIX. The recent spike in the OEX ratio was  probably the highest ever (the highest in 20 years at a minimum).  Spikes in the equity p-c ratio to below 0.40 have occurred before, but they are also rare – click to enlarge.

 

The 10 day moving averages of the above shown put-call volume ratios:

 

pc-ratios-10dmaThe 10-day moving averages of the p-c ratios have come in a bit, but remain historically at very low, resp. high levels. Note that if a warning signal is legitimate, it usually has a certain lead time (two to four weeks). It is impossible to tell in advance whether it warns merely of a run-of-the-mill correction or of something worse – click to enlarge.

 

The true broad US money supply TMS-2 has resumed its growth in recent weeks, after a slight dip in previous weeks. Note that we are showing the 'quick version' without memorandum items; these usually add up to another $50-$80 billion (in crisis situations, certain memorandum items can swell to far bigger amounts, but usually they can be safely ignored, resp. one can simply mentally add the approximate amount mentioned above to the total. With the total money supply well over $10 trillion by now, it doesn't make a big difference).

 

TMS-2, st-annThe reason for the bubble in 'risk assets' as well as for the poor performance of the real economy: monetary pumping on an unprecedented scale in the modern era – click to enlarge.

 

TMS-2, y-y-growth-annThe year-on-year growth rate of the money supply is very important for financial assets. Although it has been roughly cut in half from the peak, it remains historically quite high at nearly 8%. As can be seen, the crisis was precipitated by a mere slowdown in monetary inflation. This phenomenon can be observed prior to every financial market crisis of the modern era. Funny enough, the bureaucrats responsible for the sequential bubbles and busts seem not to be aware of this (at least we have never heard any of them mention it) – click to enlarge.

 

Conclusion:

There is still plenty of inflationary support for the market, but with sentiment at nose-bleed levels and some measures continuing to send warning signs, some kind of setback is probably brewing. Note also that 'tapering' will eventually lead to a further slowdown in money supply growth, although there is the caveat that the commercial banks have recently upped the pace of fiduciary media creation (i.e., the creation of money from thin air by dint of inflationary lending). Even though money supply continues to be supportive – which actually opens up the possibility of a blow-off move continuing for a while – one must also keep in mind that  margin debt is extremely high and cash reserves at mutual funds extremely low. A sharp market break has therefore the potential to snowball. Risk remains extremely high.

 

 

Charts by: Sentimentrader, StockCharts, St. Louis Federal Reserve Research

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

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: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “Market Sentiment and Money Supply Update”

  • No6:

    Any set backs will be met by more direct Fed stock buying. Another GFC will be politically unacceptable. Money supply growth will have to head back up.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • How to Get Ahead in Today’s Economy
      “Literally On Fire” This week brought forward more evidence that we are living in a fabricated world. The popular story-line presents a world of pure awesomeness. The common experience, however,  falls grossly short.   There are many degrees of awesomeness, up to total awesomeness – which is where we are these days, in the age of total awesomeness, just a short skip away from the Nirvana era. What is Nirvana, you may wonder? We only know for sure that Nirvana is what...
  • Gold and Gold Stocks – Conundrum Alert
      Moribund Meandering Earlier this week, the USD gold price was pushed rather unceremoniously off its perch above the $1300 level, where it had been comfortably ensconced all year after its usual seasonal rally around the turn of the year. For a while it seemed as though the $1,300 level may actually hold, but persistent US dollar strength nixed that idea. Previously many observers (too many?) expected gold to finally break out from its lengthy consolidation pattern, but evidently the...
  • US Money Supply Growth Jumps in March , Bank Credit Growth Stalls
      A Movie We Have Seen Before – Repatriation Effect? There was a sizable increase in the year-on-year growth rate of the true US money supply TMS-2 between February and March. Note that you would not notice this when looking at the official broad monetary aggregate M2, because the component of TMS-2 responsible for the jump is not included in M2. Let us begin by looking at a chart of the TMS-2 growth rate and its 12-month moving average.   The y/y growth rate of TMS-2...
  • Fear and Longing - Precious Metals Supply and Demand
      Waiting for Permanent Backwardation  The price of gold dropped 9 bucks, while that of silver rose 3 cents. Readers often ask us if permanent backwardation (when gold withdraws its bid on the dollar) is still coming. We say it is certain (unless we can avert it by offering interest on gold at large scale). They ask is it imminent, and we think this is with a mixture of fear and longing for a higher gold price.   Lettuce hope this treasure is not cursed... but it probably is....
  • Scorn and Reverence - Precious Metals Supply and Demand
      Shill Alarm One well-known commentator this week opined about the US health care industry:   “...the system is designed the churn and burn... to push people through the clinics as quickly as possible. The standard of care now is to prescribe some medication (usually antibiotics) and send people on their way without taking the time to conduct a comprehensive examination.”   From the annals of modern health care... [PT]   Nope. That is not the standard...
  • Gold and Gold Stocks – The Gloom Patrol
      Fun with Positioning and Sentiment Last week we discussed the gold sector “conundrum” – the odd fact that there is apparently quite strong demand for gold despite a macroeconomic environment that would normally be considered quite bearish for the metal. Gold recently seems to have lost its last remaining inter-market “ally” if you will, as the dollar has begun to enter an uptrend as well. Positioning data in precious metals futures are nevertheless rather remarkable, given the...
  • Global Turn-of-the-Month Effect – An Update
      In Other Global Markets the “Turn-of-the-Month” Effect Generates Even Bigger Returns than in the US The “turn-of-the-month” effect is one of the most fascinating stock market phenomena. It describes the fact that price gains primarily tend to occur around the turn of the month. By contrast, the rest of the time around the middle of the month is typically far less profitable for investors.   Good vs. bad seasonal timing...   [PT]   The effect has been studied...
  • Tales from “The Master of Disaster”
      Tightening Credit Markets Daylight extends a little further into the evening with each passing day.  Moods ease.  Contentment rises.  These are some of the many delights the northern hemisphere has to offer this time of year. As summer approaches, and dispositions loosen, something less amiable is happening.  Credit markets are tightening.  The yield on the 10-Year Treasury note has exceeded 3.12 percent.   A change in pace: yields are actually going somewhere. There is...
  • Is Political Decentralization the Only Hope for Western Civilization?
      Voting with their Feet A couple of recent articles have once more made the case, at least implicitly, for political decentralization as the only viable path which will begin to solve the seemingly insurmountable political, economic, and social crises which the Western world now faces.   Fracture lines – tax and regulatory competition allows people to “vote with their feet” - and they certainly do. [PT]   In the last few months, over 3,000 millionaires have...
  • Getting Out of Dodge
      Rare Commodity Modern economists are prone to shouting fire in a crowded theater.  The world is full of seeming incongruences. Economists puzzle over things like population growth and arable acres of farmland. They project out a linear scenario of increasing divergence, and see a catastrophe in the making.   Professional scaremonger Thomas Robert Malthus, one in a long line of scarcity prophets who failed to recognize the capacity of human ingenuity and free markets to...
  • “Sell In May And Go Away” - A Reminder: In 9 Out Of 11 Countries It Makes Sense To Do So
      A Truism that is Demonstrably True Most people are probably aware of the adage “sell in May and go away”. This popular seasonal Wall Street truism implies that the market's performance is far worse in the six summer months than in the six winter months. Numerous studies have been undertaken in this context particularly with respect to US stock markets, and they  confirm that the stock market on average exhibits relative weakness in the summer.   Look at the part we...
  • Why the Fundamental Gold Price Rose - Precious Metals Supply and Demand
      Gold Lending and Arbitrage There was no rise in the purchasing power of gold this week. The price of gold fell $22, and that of silver $0.19. One question that comes up is why is the fundamental price so far above the market price? Starting in January, the fundamental price began to move up sharply, and the move sustained through the end of April.   1-month LIBOR (London Interbank Offered Rate – the rate at which banks lend euro-dollars to each other). LIBOR and GOFO...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Dog Blow

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist