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: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

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 Survive the Winter
      A Flawless Flock of Scoundrels One of the fringe benefits of living in a country that’s in dire need of a political, financial, and cultural reset, is the twisted amusement that comes with bearing witness to its unraveling.  Day by day we’re greeted with escalating madness.  Indeed, the great fiasco must be taken lightly, so as not to be demoralized by its enormity.   Symphony grotesque in Washington [PT]   Of particular note is the present cast of characters. ...
  • Credit Spreads: The Coming Resurrection of Polly
      Suspicion isn't Merely Asleep – It is in a Coma (or Dead) There is an old Monty Python skit about a parrot whose lack of movement and refusal to respond to prodding leads to an intense debate over what state it is in. Is it just sleeping, as the proprietor of the shop that sold it insists? A very tired parrot taking a really deep rest? Or is it actually dead, as the customer who bought it asserts, offering the fact that it was nailed to its perch as prima facie evidence that what...
  • The Strange Behavior of Gold Investors from Monday to Thursday
      Known and Unknown Anomalies Readers are undoubtedly aware of one or another stock market anomaly, such as e.g. the frequently observed weakness in stock markets in the summer months, which the well-known saying “sell in May and go away” refers to. Apart from such widely known anomalies, there are many others though, which most investors have never heard of. These anomalies can be particularly interesting and profitable for investors – and there are several in the precious metals...
  • A Falling Rate of Discount and the Consumption of Capital
      Net Present Value Warren Buffet famously proposed the analogy of a machine that produces one dollar per year in perpetuity. He asks how much would you pay for this machine? Clearly it is worth something more than $1.00. And it’s equally clear that it’s not worth $1,000. The value is somewhere in between. But where?   We are not sure why Warren Buffett invoked a money printing machine of all things – another interesting way of looking at the concept is by e.g....
  • Business Cycles and Inflation – Part I
      Incrementum Advisory Board Meeting Q4 2017 -  Special Guest Ben Hunt, Author and Editor of Epsilon Theory The quarterly meeting of the Incrementum Fund's Advisory Board took place on October 10 and we had the great pleasure to be joined by special guest Ben Hunt this time, who is probably known to many of our readers as the main author and editor of Epsilon Theory. He is also chief risk officer at investment management firm Salient Partners. As always, a transcript of the discussion is...
  • What President Trump and the West Can Learn from China
      Expensive Politics Instead of a demonstration of its overwhelming military might intended to intimidate tiny North Korea and pressure China to lean on its defiant communist neighbor, President Trump and the West should try to learn a few things from China.   President Trump meets President Xi. The POTUS reportedly had a very good time in China. [PT] Photo credit: AP   The President’s trip to the Far East came on the heels of the completion of China’s...
  • Is Fed Chair Nominee Jay Powell, Count Dracula?
      A Date with Dracula The gray hue of dawn quickly slipped to a bright clear sky as we set out last Saturday morning.  The season’s autumn tinge abounded around us as the distant mountain peaks, and their mighty rifts, grew closer.  The nighttime chill stubbornly lingered in the crisp air.   “Who lives in yonder castle?” Harker asked. “Pardon, Sire?” Up front in the driver's seat it was evidently hard to understand what was said over the racket made by the team of...
  • Business Cycles and Inflation, Part II
      Early Warning Signals in a Fragile System [ed note: here is Part 1; if you have missed it, best go there and start reading from the beginning] We recently received the following charts via email with a query whether they should worry stock market investors. They show two short term interest rates, namely the 2-year t-note yield and 3 month t-bill discount rate. Evidently the moves in short term rates over the past ~18 - 24 months were quite large, even if their absolute levels remain...
  • A Different Powelling - Precious Metals Supply and Demand Report
      New Chief Monetary Bureaucrat Goes from Good to Bad for Silver The prices of the metals ended all but unchanged last week, though they hit spike highs on Thursday. Particularly silver his $17.24 before falling back 43 cents, to close at $16.82.   Never drop silver carelessly, since it might land on your toes. If you are at loggerheads with gravity for some reason, only try to handle smaller-sized bars than the ones depicted above. The snapshot to the right shows the governor...
  • Heat Death of the Economic Universe
      Big Crunch or Big Chill Physicists say that the universe is expanding. However, they hotly debate (OK, pun intended as a foreshadowing device) if the rate of expansion is sufficient to overcome gravity—called escape velocity. It may seem like an arcane topic, but the consequences are dire either way.   OT – a little cosmology excursion from your editor: Observations so far suggest that the expansion of the universe is indeed accelerating – the “big crunch”, in...
  • Claudio Grass Interviews Mark Thornton
      Introduction Mark Thornton of the Mises Institute and our good friend Claudio Grass recently discussed a number of key issues, sharing their perspectives on important economic and geopolitical developments that are currently on the minds of many US and European citizens. A video of the interview can be found at the end of this post. Claudio provided us with a written summary of the interview which we present below – we have added a few remarks in brackets (we strongly recommend...
  • Precious Metals Supply and Demand
      A Different Vantage Point The prices of the metals were up slightly this week. But in between, there was some exciting price action. Monday morning (as reckoned in Arizona), the prices of the metals spiked up, taking silver from under $16.90 to over $17.25. Then, in a series of waves, the price came back down to within pennies of last Friday’s close. The biggest occurred on Friday.   Silver ended slightly up on the week after a somewhat bigger rally was rudely interrupted...

Support Acting Man

Top10BestPro
j9TJzzN

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]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com