The Mother of All Blow-Offs

We didn’t really plan on writing about investor sentiment again so soon, but last week a few articles in the financial press caught our eye and after reviewing the data, we thought it would be a good idea to post a brief update. When positioning and sentiment reach levels that were never seen before after the market has gone through a blow-off move for more than a year, it may well be that it means something for once.

 

Sloshed as we are…   a group of professional investors prepares for a day of hard work on Wall Street. The tedium of a market that goes up a little bit every day, day in day out, is taking its toll.

 

Interestingly, the DJIA has fully participated in the blow-off this time, contrary to what happened at the end of the 1990s bull market and the first echo boom that ended in 2007. On the monthly chart the venerable Dow Industrials Average now sports on RSI of roughly 90, which is really quite rare.

 

The “slightly overbought” DJIA sports an RSI of 89.59 on its monthly chart in the wake of the blow-off move over the past year.

 

If you think this looks like the exact opposite of what we have seen at the lows in 2009, you are entirely correct – it is indeed the opposite in every conceivable respect. In 2009 the news were uniformly bad; nowadays, we are flooded with good news on the economy and corporate earnings. In 2009 stocks were cheap  – if not really historically cheap – now they are in many ways at their most expensive in history, particularly if one considers the median stock rather than  just the capitalization-weighted indexes.

 

Singing From the Same Hymn Sheet

We recall that the reading of the Daily Sentiment Index of S&P futures traders stood at just 3% bulls on the day of the March 2009 low. Looking at sentiment data today, there are probably 3% bears left. What prompted us to take a closer look at the data was an article at Marketwatch about the positioning of Ameritrade customers – in other words, self-directed retail investors. The article is ominously entitled “Retail investor exposure to stock market is at an all-time high”. An all time high? Isn’t this supposed to be the “most hated” bull market ever? That hasn’t been true for quite a while actually. Ameritrade helpfully provided a chart of its “Investor Movement Index” (IM Index), which measures the aggregate stock market exposure of its clients.

 

At the height of the Fed’s QE3 operation in 2014, retail investors were almost “pessimistic” compared to today. The Ameritrade IM Index is currently above 8, but it already established a new record high when it crossed 7.0 for the first time last summer.

 

On the day we looked at the article, we quickly jotted down the titles of other articles Marketwatch suggested to its readers via embedded links. We suspected these might at least partly change after a while and wanted to preserve what we saw. The headlines were quite telling:

 

Read: Why Monday is a ‘big day for bulls’—and could suggest gains of nearly 20% in 2018

See: Stock-market investors should ‘brace for a possible near-term melt-up: Jeremy Grantham

Read: Stock optimism swells as S&P 500 hits most overbought level in 22 years

Retail investors — according to a Deutsche Bank analysis of consumer sentiment data — view the current environment as “the best time ever to invest in the market”.

And the “most popular” article on Marketwatch that day was:

Here’s what could trigger a 30% stock-market melt-up, says investor Bill Miller

 

This is of course not what the people quoted in these articles said in previous years – least of all in 2009. The main point is of course their unanimity, which emerges only after a relentless march higher. For all we know, they could well be right – take for example the call for yet another 30% “melt-up”: it sounds crazy to us, but in a blow-off even a mere handful of weeks can make a big difference. One only has to recall the explosive run in the Nasdaq from November 1999 to March 2000 (it rose by 80% in that brief time period).

 

Investors Large and Small – All Are on the Same Page

So is this now the stage when “professionals” are distributing stocks to retail investors? Not really, actually. If anything, they are even more in love with stocks. Mish pointed out last week that hedges have become quite unpopular among fund managers – which is funny, because hedges have also become quite cheap. But it seems that few fund managers want to “risk” underperforming their benchmarks even by a few basis points, as that could well cost them customers (and bonuses).

If the market crashes, they will all be in the same boat and will collectively point to the fact that “no-one could have seen it coming”. Also, it is after all OPM they are supervising – and isn’t it anyway a tradition that the customers shall remain yacht-less?

This lack of demand for hedges was recently noticed by a quantitative analyst at Morgan Stanley as well, as Zerohedge reports. The man audaciously recommends buying a few puts for a quick pullback. It is well worth looking at the charts that go with the report – we rarely see all thoughts of downside potential abandoned so thoroughly.

For instance, customer holdings of SPX calls reached the 100th percentile, and holdings of puts fell to the zero percentile. No further escalation is possible in this case – that’s it, basically. In other words, a new boundary for the bullish consensus among the firm’s clients has been set – it has never been where it is now. Customer demand for long S&P futures positions concurrently hit a new record high at Morgan Stanley as well.

We want to keep our focus on individual investors though, mainly because they are normally rather cautious. If one looks at a long term chart of the AAII survey (American Association of Individual Investors), it usually shows a fairly sizable proportion of skeptical investors. They rarely go overboard collectively with foaming-at-the-mouth bullishness, but that has clearly changed. The chart below is from a Bloomberg article that appeared last week, entitled “Signs of Euphoria Are So High Investors Are ‘Having a Hard Time Imagining a Decline’”. We imagine that their imagination will soon be jolted back to life.

 

The bullish consensus according to the AAII survey has reached a 7.3-year high (as of January 03).

 

Readings in the 60% to 70% area are traditionally peak levels for the AAII consensus. However, a somewhat deeper analysis shows that this reading masks the fact that the exposure to stocks among the survey respondents in terms of a percentage allocation is actually at a 17-year high (i.e., the highest since 2000).

The next chart has appeared in the monthly Elliott Wave Financial Forecast and depicts the gap between the stock and cash allocation of AAII respondents, as well as the 13-week average of the bullish consensus among investment advisors. The latter has reached a 40-year high. Note the contrast to the survey results recorded at the 2009 low, when the most popular stocks could be bought for a fraction of the prices they trade at today.

 

A tale of two surveys: the AAII stock/cash allocation gap and the 13-week average of the percentage of bullish advisors in the Investors Intelligence survey. These readings represent rare extremes as well.

 

In Part 2 we take a closer look at the “other side of the trade”, namely bears and short sellers, or rather, what is left of them. It is a sorry sight.

 

Charts by: StockCharts, AmeriTrade, Bloomberg, EWI

 

 

 

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

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...
  • Getting High on Bubbles
      Turn on, Tune in, Drop out Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD).   Dr. Albert Hoffman and his famous bicycle ride through Basel after he ingested a few drops of LSD-25 by mistake. The photograph in the middle was taken at the Woodstock festival and inter alia serves as a...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

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