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.
Currently 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:
The 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.
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.
This 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).
Equity 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:
The 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).
The 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.
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
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 “Market Sentiment and Money Supply Update”
Most read in the last 20 days:
- Fresh Mainstream Nonsense on Gold Demand
They Will Never Get It... We and many others have made a valiant effort over the years to explain what actually moves the gold market (as examples see e.g. our article “Misconceptions About Gold”, or Robert Blumen's excellent essay “Misunderstanding Gold Demand”). Sometimes it is a bit frustrating when we realize it has probably all been for naught. Gold wants to know what it has done now... Photo credit: Ajay Verma / Reuters This was brought home to...
- Switzerland About to Vote on “Free Lunch” for Everyone
Will the Swiss Guarantee CHF 75,000 for Every Family? In early June the Swiss will be called upon to make a historic decision. Switzerland is the first country worldwide to put the idea of an Unconditional Basic Income to a vote and the outcome of this referendum will set a strong precedent and establish a landmark in the evolution of this debate. The Swiss Basic Income Initiative in a demonstration in front of parliament. As we have previously reported (see “Swiss...
- Drowning the Fir
Presidential Duties Our editor recently stumbled upon an image in one of the more obscure corners of the intertubes which we felt we had to share with our readers. It provides us with a nice metaphor for the meaningfulness of government activity. First, here is a look at the picture – just quietly contemplate it for while and let it work its magic on you: Yes, these two gentlemen are actually watering a tree in the middle of a downpour... Photo via...
- Gold – The Commitments of Traders
Commercial and Non-Commercial Market Participants The commitments of traders in gold futures are beginning to look a bit concerning these days – we will explain further below why this is so. Some readers may well be wondering why an explanation is even needed. Isn't it obvious? Superficially, it sure looks that way. As the following chart of the net position of commercial hedgers illustrates, their position is currently at quite an extended...
- Heretical Thoughts and Doing the Unthinkable
Heresy! NORMANDY, France – The Dow rose 222 points on Tuesday – or just over 1%. But we agree with hedge-fund manager Stanley Druckenmiller: This is not a good time to be a U.S. stock market bull. Legendary former hedge fund manager Stanley Druckenmiller at the Ira Sohn conference – not an optimist at present, to put it mildly. Photo credit: David A. Grogan / CNBC Speaking at an investment conference in New York last week, George Soros’ former partner...
- Staying Home on Election Day
Pretenses and Conceits The markets are eerily quiet… like an angry man with something on his mind and a shotgun in his hand. We will leave them to brood… and return to the spectacle of the U.S. presidential primaries. On display are all the pretenses, conceits, and absurdities of modern government. And now, the race narrows to the two most widely distrusted and loathed candidates. US election circus: Deep State Rep vs. Rage Channeller The first, a loose...
- How the Deep State’s Cronies Steal From You
Expanding in Ireland DUNMORE EAST, Ireland – We came down the coast from Dublin to check on our new office building. For this visit, we wanted to stay somewhere different than we normally do. So we chose a small hotel on the coast, called the Strand Inn. Irish landscape with alien landing pads. Even the guys from Rigel II have heard about Ireland's corporate tax rate. Photo credit: Tourism Ireland It is an excellent place for seafood and soda bread on a...
- The Japanese Popsicle Affair
Policy-Induced Contrition in Japan As we keep saying, there really is no point in trying to make people richer by making them poorer – which is what Shinzo Abe and Haruhiko Kuroda have been trying to do for the past several years. Not surprisingly, they have so to speak only succeeded in achieving the second part of the equation: they have certainly managed to impoverish their fellow Japanese citizens. Shinzo Abe and Haruhiko Kuroda, professional yen assassins Photo credit:...
- Kuroda-San in the Mouth of Madness
Deluded Central Planners Zerohedge recently reported on an interview given by Lithuanian ECB council member Vitas Vasiliauskas, which demonstrates how utterly deluded the central planners in the so-called “capitalist” economies of the West have become. His statements are nothing short of bizarre (“we are magic guys!”) – although he is of course correct when he states that a central bank can never “run out of ammunition”. BoJ governor Haruhiko Kuroda Photo credit:...
- Revolution at the Ranch
Alarming News BALTIMORE, Maryland – An alarming email came on Tuesday from our ranch in Argentina: “Bad things going on… We thought we had the originarios problem settled. Not at all. They just invaded the ranch.” Originarios on the march... Photo credit: cta.org.ar To bring new readers fully into the picture, Northwest Argentina, where we have our ranch, has a revolution going on. Some of the indigenous people – that is, people with Native...
- The Long-Buried Secret of Napoleon Bonaparte
Family Secrets DUBLIN – The smart money is getting out while the gettin’ is still good. That’s the message we get from reading the recent headlines. Here’s the Financial Times: Redemptions from stock funds have hit nearly $90 billion this year as portfolio managers and hedge funds struggle to navigate a market that no longer seems driven by radical central bank policy. S&P 500 Index: causing navigational problems - click to...
- How Elon Musk Helps Fools to Part Ways with Their Money
Tesla Goes Fishing Tesla Motors is up to something remarkable. But what it is, exactly, is unclear. According to the Tesla Motors website, the company’s mission is: to accelerate the world’s transition to sustainable transport. Tesla Model 3: the company’s first “mass market” entry so to speak, which is supposed to help the world to reach the nirvana of “sustainable” transport. On the side, it is helping a number of Wall Street firms to increase their...