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 3,000” only 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.”
Extensive deleveraging! Right.
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:
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”).
NYSE 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.
Negative 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:
NAAIM 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.
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
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”
Most read in the last 20 days:
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- US Financial Markets – Alarm Bells are Ringing
A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...