One of Wall Street’s “Biggest Bears” Throws the Towel

Recently we have come across one of those forecasts that are a dime a dozen these days, and usually escape our attention. The article at Marketwatch, entitled Bull could run 5 more years, carry S&P 500 close to 3,000only seemed interesting because the forecast sounded a bit extreme. We quickly scanned the headline, thinking that whoever was making this assertion surely hadn’t breathed a word about this when the SPX traded at just below 670 points in March of 2009. Such wildly bullish forecasts are strictly a function of SPX 2000 in our opinion, on a par with the “Dow 36,000” forecast, which gained some notoriety in the late 90s. One of the reasons behind the SPX 3000 forecast mentioned in the article did amuse us greatly though, namely the following:

 

They cite extensive deleveraging in the U.S. as well as the uneven global recovery among other reasons why “this could prove to be the longest U.S. expansion – ever.”

 

(emphasis added)

Extensive deleveraging! Right.

 

CHART-1-total US credit market debt owed“Extensive US deleveraging” in one comprehensive chart – click to enlarge.

 

However, in the meantime we have found out via Barry Ritholtz that the man making the prediction was hitherto apparently “one of Wall Street’s biggest bears”:

 

Until not so long ago, Morgan Stanley’s Adam Parker was one of the most bearish analysts on the street. […]

Following last year’s 30% S&P 500 rally, he has had a change of heart. He now has a 3000 upside target for the S&P 500.”

 

This background information actually does make the forecast a bit more interesting. It is yet another indication that bears have really capitulated across the board.

 

Recent Data – Yet Another Record Falls

In this context, take a look at the most recent Investor’s Intelligence survey. Not only has the bull-bear ratio been at a 27 year high for two weeks in a row (i.e., a reading last seen in 1987),  but the percentage of bearish advisors has actually declined to a record low (as far as we know it was never lower) – only 13.3% of all advisors surveyed by II still declare themselves to be bearish:

 

CHART-2-II-ratioThe II survey exhibits the lowest bear percentage ever – click to enlarge.

 

This is of course in line with the other sentiment and positioning data we have frequently discussed in recent weeks, such as the extremes in the Rydex ratio (currently the Rydex bull/bear asset ratio stands at 17.75, i.e., it has surged back to a level close to the recently recorded record high of 18.51). Volatility and trading volume are both exceptionally low as well.

Interestingly, although margin debt has expanded again after its initial dip from the all-time high recorded earlier this year, it only managed to rise to a slightly lower high. This is an especially interesting divergence, as a roughly similar sequence has occurred near every major peak: first, margin debt expansion “goes parabolic”, then the total amount outstanding begins to dip a few months ahead of the peak in prices, and subsequently doesn’t manage to make it back to its cyclical high. Interestingly, in spite of margin debt rising to a lower high, negative investor net worth is at a new record –  a sign that the cap-weighted indexes are masking internal weakness. This is of course confirmed by other technical data which we have recently discussed (see “Internals Are Weakening”).

 

CHART-3-NYSE-margin-debt-SPX-since-1995NYSE margin debt bounces to a lower high after peaking earlier this year. Note the similarities between the last three parabolic advances in margin debt (chart via Doug Short) – click to enlarge.

 

CHART-4-NYSE-investor-credit-SPX-since-1980Negative investor credit balances reach a new record in spite of the SPX reaching a new high and overall margin debt only rising to a lower high – this means that the average portfolio held by investors must be weaker than the cap-weighted indexes suggest – click to enlarge.

 

Finally, here is a long term chart of the NAAIM net fund manager exposure survey. What makes this data point interesting is that the recent pattern – i.e., the divergence of net exposure to prices – has been following a path that is by now beginning to look eerily similar to that of 2006-2007:

 

CHART-5-NAAIMNAAIM survey of net fund manager exposure (replies ranging from “200% short” to “200% long” are possible). The divergence with the SPX is by now very similar to that seen in 2006/7 – click to enlarge.

 

Conclusion:

The so-called “wall of worry” is certainly no longer in evidence. Stock market bears seem to have given up entirely. Of course this capitulation has been a process rather than an event, and has been going on for some time now. Still, new records are seemingly made every month.

Fairly brisk money supply growth and extremely low rates have so far helped the market to recover from every correction attempt, with volatility contracting ever further in the process. Keep in mind though that even when both valuations and sentiment data are at or near extremes, it is still possible to get a blow-off move as a kind of last hurrah – this happened e.g. in late 1999/early 2000.

As to valuations, while the cap-weighted indexes appear still well below the peak valuations of the late 90s bubble, the same is not true of the average stock. While in the late 90s a handful of big cap tech stocks greatly distorted the total market P/E, a great many genuinely cheap stocks were available at the time (the entire “value” universe was quite subdued valuation-wise). This is definitely not the case this time around. It seems that both sentiment and valuations are at or near historical extremes. Investors may well be sitting on a powder keg.

 

 

Charts by: StockCharts, Doug Short/Advisorperspectives, 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

   
 

3 Responses to “Total Capitulation of the Bears”

  • worldend666:

    The problem with the analysis above is that this time there is a steady stream of government money flowing into equities which is not subject to the whims of fund managers. This money will keep on flowing into equities regardless of what the rest of us do so it’s likely to prevent an all out rout in stock prices.

    There is also money fleeing the banking system which is looking for a safe haven in equities and the worse the banks look the greater the flow will be.

    And finally the smart money is leaving Europe and heading to the US which is likely to further levitate US equities and bonds.

    Incidentally the chart of margin debt above doesn’t look remotely like a final surge. The previous two peaks had much steeper gradients.

  • No6:

    Extraordinary central bank behaviour will lead to extraordinary investor behaviour.
    If it keeps on rainin’, levee’s goin’ to break!

  • RedQueenRace:

    “Interestingly, although margin debt has expanded again after its initial dip from the all-time high recorded earlier this year, it only managed to rise to a slightly lower high.”

    The last portion should be stated as “it [has so far] only managed to rise to a slightly lower high.”

    There has only been one data point since then and it was a relatively minor drop of a little over $4 billion, or about 0.88%. June might have been a lower high or February’s record may be eclipsed on the next release. IMO, it’s too early to call a second top.

    “negative investor net worth is at a new record”

    From where does this come? I agree that credit balances less margin debt is at a new record negative level but that is a statement of cash positions in brokerage accounts versus margin debt. That doesn’t even include all investor cash, much less net worth.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • What Do “Think Tanks” Think About?
      “Russiagate” WEST RIVER, MARYLAND – We’re back at our post – watching... reading... trying to connect the dots. And we begin by asking: What do “think tanks” think about? The answer in a minute. First, there is a dust-up in the Washington, D.C., area. “Russiagate,” it is called. As near as we can make out, some people think the Trump team had or has illegal or inappropriate contacts with the Russian government.   It's all very obvious, if one looks...
  • Parabolic Coin
      The Crypto-Bubble - A Speculator's Dream in Cyberspace When writing an article about the recent move in bitcoin, one should probably not begin by preparing the chart images. Chances are one will have to do it all over again. It is a bit like ordering a cup of coffee in Weimar Germany in early November 1923. One had to pay for it right away, as a cup costing one wheelbarrow of Reichsmark may well end up costing two wheelbarrows of Reichsmark half an hour later. These days the question is...
  • In Gold We Trust, 2017
      The 11th Annual In Gold We Trust Report This year's Incrementum In Gold We Trust report by our good friends Ronald Stoeferle and Mark Valek appears about one month earlier than usual (we already mentioned in our most recent gold update that it would become available soon). As always, the report is extremely comprehensive, discussing everything from fundamentals pertaining to gold, to technical analysis to statistical studies on the behavior of gold under different economic...
  • Quantitative Easing Explained
      [Ed. note: This article was originally posted in November of 2010 - we have decided to republish it with updated charts, as it has proved to be very useful as a reference - the mechanics of QE are less well understood than they should be, and this article explains them in detail.]   Printing Money We have noticed that lately, numerous attempts have been made to explain the mechanics of quantitative easing.  They range from the truly funny as in this by now 'viral' You Tube...
  • The Three Headed Debt Monster That’s Going to Ravage the Economy
      Mass Infusions of New Credit   “The bank is something more than men, I tell you.  It’s the monster.  Men made it, but they can’t control it.” – John Steinbeck, The Grapes of Wrath   Something strange and somewhat senseless happened this week. On Tuesday, the price of gold jumped over $13 per ounce.  This, in itself, is nothing too remarkable.  However, at precisely the same time gold was jumping, the yield on the 10-Year Treasury note was slip sliding down...
  • Recession Watch Fall 2017
      One Ear to the Ground, One Eye to the Future Treasury yields are attempting to say something.  But what it is exactly is open to interpretation.  What’s more, only the most curious care to ponder it. Like Southern California’s obligatory June Gloom, what Treasury yields may appear to be foreshadowing can be somewhat misleading.   Behold, the risk-free tide...   Are investors anticipating deflation or inflation?  Are yields adjusting to some other market or...
  • Stocks, Bonds, Euro, and Gold Go Up – Precious Metals Supply and Demand
      Driven by Credit The jobs report was disappointing. The prices of gold, and even more so silver, took off. In three hours, they gained $18 and 39 cents. Before we try to read into the connection, it is worth pausing to consider how another market responded. We don’t often discuss the stock market (and we have not been calling for an imminent stock market collapse as many others have).   NYSE margin debt has reached new record highs this year, dwarfing previous peak...
  • Jayant Bhandari on Gold, Submerging Markets and Arbitrage
      Maurice Jackson Interviews Jayant Bhandari We are happy to present another interview conducted by Maurice Jackson of Proven and Probable with our friend and frequent contributor Jayant Bhandari, a specialist on gold mining investment, the world's most outspoken emerging market contrarian, host of the highly regarded annual Capitalism and Morality conference in London and consultant to institutional investors.   As soon as Jayant touches down in London, he is accosted by...
  • Monetary Madness and Rabbit Consumption
      Down the Rabbit Hole “The hurrier I go, the behinder I get,” is oft attributed to the White Rabbit from Lewis Carroll’s, Alice in Wonderland.  Where this axiom appears within the text of the story is a mystery.  But we suspect the White Rabbit must utter it about the time Alice follows him down the rabbit hole.   Pick a rabbit to follow...   No doubt, today’s wage earner knows what it means to work harder, faster, and better, while slip sliding behind. ...
  • Mexicans and Chinese Aren’t “Stealing Our Jobs”
      Tremendous Flop GUALFIN, ARGENTINA – Now comes a report from the Financial Times that tells us the nation’s No. 1 industry – home building – has been backing up for a quarter of a century. According to the newspaper, U.S. home builders “started work on the same number of houses in the past year as they did a quarter of a century ago, even though there are 36% more people working as residential builders now than then.”   Moat contractors have been particularly bad....
  • The Anatomy of Brown’s Gold Bottom – Precious Metals Supply and Demand
      The Socialist Politician-Bureaucrat with the Worst Timing Ever As most in the gold community know, the UK Chancellor of the Exchequer Gordon Brown announced on 7 May, 1999 that HM Treasury planned to sell gold. The dollar began to rise, from about 110mg gold to 120mg on 6 July, the day of the first sale. This translates into dollarish as: gold went down, from $282 to $258. It makes sense, as the UK was selling a lot of gold... or does it?   Former UK chancellor of the...
  • Donald Trump is an Economic Ignoramus on Trade
      Upholding a Well-Worn Tradition Not surprisingly, Donald Trump has followed in the infamous footsteps of his presidential predecessors in the transition from candidate to chief executive.  Invariably, every candidate for the presidency makes a whole host of promises, the vast majority of which are horrible and typically only exacerbate the problems they attempt to resolve.   With respect to trade, Donald Trump has adopted a position that is essentially indistinguishable...

Support Acting Man

Austrian Theory and Investment

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

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]

 

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

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com