The ‘Worrisomely Unworried’ Crowd
In our Macro-Overview this week, I noted the single most dangerous risk factor to stocks is “the unusually high level of bulls.”
Alan Abelson speaks to Crosscurrent’s Alan Newman about the excessive bullish sentiment:
“When bullishness is rampant, the inference to be drawn is that buyers may have already shot their wad, and, of course, the opposite is true — that is, selling has been largely spent when bearishness is in full roar.
Alan Newman, a crack technician, and chief cook and bottle washer at newsletter CrossCurrents, offers another intriguing contrary-sentiment indicator in his latest commentary. It’s based on investor preferences in mutual funds, and he credits some Rydex charts on the Decisionpoint Website with supplying the necessary info.
Recently, Alan relates, money-market and bear-fund assets both fell to multiyear lows, while bull- and sector-fund assets mounted to their highest levels since the October 2007 market peak. Currently, he reports, there is roughly $7.50 in bull and sector funds for every $1 in bear-market fund assets, which he calls “the most ridiculously one-sided sentiment we have seen since the tech mania convinced folks that no price was too high to pay.”
And Alan, who’s usually a pretty cool cat, warns that it has all the makings of a significant downside reversal, beginning “like right now.”
This is worth paying attention to. The sentiment extreme is the biggest threat to ongoing market gains. Of all of the data that people are using to call an end to the rally, extreme sentiment is the one I pay the closest attention to.
Mike Santoli points out the “question of whether the past week’s cocktail of Goldman Sachs vilification, abiding Greek-debt drama and the stock market’s 2% loss will suffice to put a scare into what was a worrisomely unworried crowd.”
It is starting to become worrisome . . .
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Source:
Leap Before You Look
ALAN ABELSON
Barron’s May 1, 2010
http://online.barrons.com/article/SB127266756531384973.html
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May 1st, 2010 at 7:27 am
Well, BR, you must love me — I’ve been out for the whole ride. I have been sitting in money markets at zero for very close to a year.
My sentiment all along has been “This makes no sense at all to me. The productive economy needs a quintuple bypass, and the financial community just signed it up for a triathlon.”
Kinda bearish. Perhaps not now, but by mile 3 of the swim. ;)
May 1st, 2010 at 7:46 am
Quote:
Karl, How’s that “Drilly, baby Drilly” thing going for yah? — VennData
May 1st, 2010 at 9:08 am
The sentiment extreme is the biggest threat to ongoing market gains.
I’d put that down the list a bit after Europe, China and unresolved bank weakness in mortgages and commercial loans. The banks have a lot of shallow buried corpses in their back yards, only the convenient accounting changes provide any cover for them.
May 1st, 2010 at 9:33 am
CR has a chart this morning, Government backed mortgages account for 96% of the market in Q1: 96.5% of Mortgages Backed by Government entities in Q1
Kind of reminds you of the good old days of CRA, doesn’t it? Ha!
Given there is no appetite for private mortgage guarantees, given that unemployment remains fairly high (ha!), given that the financial sector is on government life support (forget accounting for bad loans, forget reserves, just declare the profits on the money we give you so that the rubes will think things are going better), given that ….where was I?
Oh, the market may correct? Geez, that would be a shock….
May 1st, 2010 at 9:48 am
I could buy into the idea of a correction here because we finally have some negative domestic headline flow for one. That is unlike most of the negative headline flow we have seen because most of it was emanating from Europe, and not impacting, or having the potential to impact US corporate earnings in a meaningful way.
First, this oil spill is downright scary since we have no idea when this oil well will be capped. The environmental damage, and the potential economic ramifications thereof are an unknown. From the stock market’s perspective it’s the economic fallout on the Southeastern US regional economy that is concerning. Moreover, the impact on the earnings of energy companies doing business in the Gulf of Mexico is particularly uncertain. What will happen to offshore drilling? It’s safe to say at this point that no one really knows.
Second, the SEC probe into Goldman Sachs widening into a criminal probe puts a major cloud over not only that stock, but also other major financial institutions. Who knows if there are other shoes to drop implicating other firms? What are the potential impacts on earnings of financial reform?
The SP500 stool restss on 4 major legs : financial services, energy, healthcare and industrials/basic materials. When 2 legs of that stool are wobbly, the index has a problem.
As for the statement: “Currently, he reports, there is roughly $7.50 in bull and sector funds for every $1 in bear-market fund assets, which he calls “the most ridiculously one-sided sentiment we have seen since the tech mania convinced folks that no price was too high to pay.” I would like to know how much that ratio has moved up from the beginning of the year. Abelson does not provide any perspective on that (or perhaps he has and BR didn’t post it here). Was the ratio of bull and sector funds for every $1 in bear market funds closer to 4…5…6…7 back in December? If it hasn’t moved up that much in the last 4 months, then I think it’s an ”un-reason” for a market correction. If it has, then ok, sure it’s quite valid.
And as usual, Abelson always is most willing to point out reasons to be bearish, permabear that he is. I tend to dismiss out of hand anyone who is a permabull or a permabear.
May 1st, 2010 at 9:50 am
comprehensive article on potential PIGS fallout in today’s Globe and Mail newspaper (Canada)
‘European and American banks have $1.7-trillion (U.S.) of exposure to Portugal, Ireland, Spain and Greece.’
http://www.theglobeandmail.com/report-on-business/economy/the-bigger-fear-behind-greece-contagion/article1553187/
May 1st, 2010 at 10:20 am
Ben is hell bent on keeping ZRP pushing including grandpa and grandma to take risk for his re-inflation agenda. Along with ‘Extend and Pretend’ policies plus Enron style accounting, everyone appears to think govt would not allow TBTF especially before November. People appear to short memory regarding 2007. Robust 1qtr earnings have convinced many that we are back to ‘Happy days are again’. Forward P/E is less reliable in the current environment!
Those of us sane enough, not to ignore the reality have been punished severely by Perception created by spin machine in cahoot with MSM.
Bottom linea is there cannot b e healthy Equity market without a healthy Credit market, in the long run! Credit market is still in ICU!
May 1st, 2010 at 10:28 am
That VXX trade is looking better by the day ;)
May 1st, 2010 at 10:33 am
“An economy barely alive. Gentlemen, we can rebuild it. We have the technology. We have the capability to build the world’s first bionic economy … Better than it was before. Better, stronger, faster.”
— The Six Quadrillion Dollar Economy.
May 1st, 2010 at 11:40 am
Well, I believe the home buyer tax credit expired yesterday. There’s still many places for sale around me. And then Calculated Risk posted this snipit Thursday:
“From Alana Semuels at the LA Times: ’99ers’ dread future without jobless benefits
In California, state officials estimate there are nearly 100,000 people who are still looking for work but can no longer draw an unemployment check. Federal labor officials could not provide a number nationally, but private-sector experts say it could easily top 1 million.
What is certain is that, as the jobless rate remains stubbornly high, more Americans will have to face the challenge of making ends meet without a monthly check.
“People are going off a cliff and we’re not really doing anything about it,” said Andrew Stettner, deputy director of the National Employment Law Project.”
Are those “1 million” going to turn to a life of crime to feed themselves???
May 1st, 2010 at 11:43 am
There seems to be no shortage of worries here… that almost certainly means the market can party on, with only the occasional 5% “correction” along the way to truly scary heights.
I believe this is called “climbing the
wallbump of worry”.May 1st, 2010 at 11:57 am
Amazing. The powers that be won’t allow things to fall apart before the November elections. The unemployment rate will somehow miraculously remain under 10%. If you only read the headlines, you would think all is well….improving.
May 1st, 2010 at 12:01 pm
[...] Disclosures « The ‘Worrisomely Unworried’ Crowd [...]
May 1st, 2010 at 12:07 pm
A bit of game theory speculation.
Stock valuations have played a significant role in propping up the economy. The wealth effect that allows consumers to open their wallets, the ability to sell stocks to raise money for down payments on houses, autos etc., the ability of corporations to use their stock as currency for acquisitions and as equity to back new debt issues. The rug would be pulled out from under a weak and fragile economy if stocks undergo a major correction, particularly in light of the continued weak housing market and the growing global sovereign debt risks which could ultimately extend to the US dollar. The Federal Reserve is aware of these risks and will therefore act to prevent a major correction in stock valuations from occurring.
May 1st, 2010 at 12:19 pm
Great post from Doug Noland:
“I’ll date the beginning of the end for the Wall Street/mortgage finance Bubble on June 7, 2007. While subprime problems had been festering for months, that was the day Bear Stearns announced that two of its mortgage derivatives funds would no longer allow redemptions. From that moment on, speculative finance was on it way out of the mortgage sector. I would not be surprised if Tuesday April 27, 2010 marked an important inflection point for the Global Government Finance Bubble. The stock market was able to muddle through more than a year of mortgage market tumult before succumbing to an all-out crisis. So, marketplace complacency in the face of expanding crises in European debt markets and Wall Street risk intermediation is not all that surprising.
Greek debt contagion took a dramatic turn for the worst. Two-year Portuguese government yields jumped 104 bps Monday to 3.97% and then spiked above 5% in Tuesday’s rapidly escalating market dislocation. After beginning the month at 1.58%, Portugal’s two-year government yields Wednesday traded as high as 5.93%. At the worst of the week’s dislocation, Portuguese Credit default protection jumped to 450 bps, after starting April at 144 bps. Ireland’s two-year government yields surged as high as 4.28%, up from last Friday’s 2.34%. Yields in Spain jumped above 2.3%, after ending last week at 1.70%. Italian two-year yields also jumped as much at 50 bps from Friday’s level to approach 2.0%. It is certainly worth mentioning that Greek two-year yields rose above 18% Wednesday, before ending the week at 12.67% (after beginning the year at 4%).
And most will argue, perhaps even persuasively, that European debt market tumult will have little impact on our market and economic recoveries. Readers surely remember how the U.S. economic expansion was supposed to be immune to subprime woes. But fragility is inherent to Bubbles, and contagion is fundamental to Bubble risk. It is the nature of things that the weakest link tends to be the first to succumb. And as confidence falters, previous risk misperceptions are comprehended and complacency is abandoned – greed morphs to fear and the dominoes begin to tumble. I don’t know how much or for how long it might take for contagion to find its way to U.S. debt markets. I am, however, confident that we face enormous structural debt issues that the markets won’t disregard forever.
The Goldman fiasco does not inspire confidence. Tuesday April, 27 was not a good day for Goldman, proprietary trading, the OTC derivatives marketplace or private-sector risk intermediation. It definitely marked an inflection point for efforts to impose greater regulatory restraint upon the financial sector. The old ways may have persevered through the LTCM, Enron, GSE and mortgage fiascos, but today’s intense scrutiny of Goldman Sachs will alter the manner in which Wall Street goes about its business. The near-term ramifications for our government-dominated Credit system and economy are anything but clear. There days financial conditions are loose, confidence is high, market liquidity remains overabundant, and there is little difficulty intermediating risky Credit. But there is, at the same time, Bubble fragility unrecognized in an overconfident marketplace.
Reigning in Wall Street proprietary trading desks and derivatives operations pose major additional challenges for an already challenged private-sector Credit mechanism. The Street’s new realities will make it more difficult for private-sector Credit to anytime soon supplant Washington’s Credit juggernaut. From my perspective, this equates to massive deficits – for bigger and longer. This means, at some point, greater market risk to a change in market perceptions and a surprising jump in yields. And I would argue that Goldman and Wall Street’s problems ensure that the markets for risk intermediation – interest-rate, Credit, equities, currency, etc. – become less liquid and more vulnerable to dislocation.
Perhaps it doesn’t matter all that much for now, but the dislocation that unfolded in European Credit default swap markets on Tuesday April, 27, 2010 portend serious issues for sovereign debt markets both abroad and at home. There’s hope that European policymakers and the IMF can come up this weekend with a credible plan for Greek aid. I would tend to believe that the “genie is out the bottle” and that global markets are in the early stage of adjusting to new uncertainties and risk realities. Many that have planned on using derivatives markets to hedge future market risks may begin to reevaluate their approach to risk taking and management.”
http://www.safehaven.com/article/16619/tuesday-april-27-2010
May 1st, 2010 at 12:27 pm
You ever figured out why the RSS feed jumps around so much? Did it just decrease 13,000 in the last few days?
May 1st, 2010 at 1:37 pm
Chief Tomahawk:
I don’t know, maybe this will become the national anthem:
May 1st, 2010 at 1:37 pm
Well that didn’t work, so try this:
http://www.youtube.com/watch?v=X9VZFyLQzok
May 1st, 2010 at 1:39 pm
Or this one might:
http://www.youtube.com/watch?v=v3tLCEwGu-s
May 1st, 2010 at 2:32 pm
Couldn’t this stat be highly coincident? Money market funds don’t lose value, but for every up tick in the market, stock funds gain value and bear funds lose value. This distorts the value measurement. I’d also add that bear funds cannot hold conventional assets and their underlying securities are probably losing value because of delta on price increases, vega on the trending market and despite the low cost of capital, theta still declines. Stock funds don’t suffer from those same losses as delta is 1, vega on a stock fund is always less, and there is no theta. You don’t get as much convincing info from this stat as suggested because one asset class has had a much better run than the other when the inverse asset class is fighting a losing battle as they have to fight the greeks on a daily basis. A flow of funds stat makes more sense in this case.
I’m practicing for an insurance derivatives exam so posting my logic helps me learn whether I’m right or wrong. Thanks Barry
May 1st, 2010 at 2:37 pm
Im definitely worried but until money stops being free for the financial system I have a hard time seeing the market go down significantly. Over the near term the market hasnt been able to break past 1220 level or resistance so I would think at least a short term pullback would happen but I don’t think its a correction yet, people are still way too bearish and everyone “knows” the market is due for a correction. That said I’m still way overallocated in safe investments.
May 1st, 2010 at 2:56 pm
Yes, a correction is coming very soon.
The more challenging question is whether we’ll see 1210 before 1150, or vice versa.
I don’t have a whole lot of conviction either way, although I lean more towards the idea of seeing 1210 first.
May 1st, 2010 at 3:52 pm
@DL
In honor of structured products everywhere – I’ve been laying a similar bet even money at work 1300 vs 1050 (which will we hit first?)
People have been jumping all over the 1050 despite the fact SPX was @ 1200 when I was laying it.
I’m on record for 1300. But I’m sure the heat is coming….
May 1st, 2010 at 5:14 pm
scharfy @ 3:52
Yeah, I’ll go with 1300 before 1050.
May 1st, 2010 at 5:32 pm
Sentiment Surveys
The weekly AAII survey from US retail investors shows a slight uptick in optimism. Those expecting higher prices in the next 6 months increased to 41.4%. The bears also fell – down to 28.6% – bringing the bull ratio to 59%. During the past few years we’ve seen the market crest when the bull ratio reaches 68% (that is the ratio of bulls to the total of bulls and bears). We are still quite a ways from that level so the AAII survey is still not giving the longs something to be concerned about.
See investors intelligence bull ratio Apr 2010
The only worrisome development one may point to is that while the S&P 500 stayed basically flat (at ~1209) between the time of the previous survey and this week’s survey, we are seeing bullishness increase from 38.2% to 41.4% (as well as the bull ratio from 53% to 59%). This doesn’t take into account the effect of Friday’s market selloff which could persuade the AAII members to rein in their optimism. We’ll see how things develop next week but for now, I’m not too concerned about this.
The latest Investors Intelligence survey from ChartCraft showed the bullish camp rising to 54.0% from 53.3%. The bears are at 18% (a slight decrease from 17.4%). This is the largest portion of bulls from the II survey since early 2008. As well, the bull ratio this week is 3:1 for the second consecutive week – a level which has in the past corresponded with market tops.
The Hulbert Newsletter Sentiment Survey is showing a similar air of exuberance, especially among Nasdaq market timers. According to Mark Hulbert, these newsletters are recommending their clients to have a 80% net long exposure to the Nasdaq. That is not only an incredibly fast change of heart from just a few months ago but it is also the highest level of enthusiasm going back to the 2000 when these same newsletters suggested an exposure of 90% for a few weeks during the month of July 2000.
The all time record is held by one single day: April 4rd 2000 at an astonishing +114.3% – when they were suggesting their clients go long with leverage, to disastrous ends. While it is no secret that the technology sector has been leading the general market with a very strong relative strength, this as well as the next sentiment measure would suggest that, at least in the short term, it would be smart to take cash off the table.
Rydex Traders
Smart strategists like Jeremy Grantham are staring to wonder aloud about the rampant speculative forces and whether we have yet another bubble forming. As he explains, traders are compelled to play with fire because of the Fed. When there is free money to be had, it is normal to find capital rushing in.
Like a Pavlovian dog, Rydex timers have been trained by the combination of repeated and profitable “buy the dips” lessons during this cycle and the relative strength of the Nasdaq. We find them taking an increasingly aggressive stance, upping the stakes each time. Most recently they have invested more than 4 times the money in the leveraged Nasdaq 100 index fund than in the leverage Nasdaq 100 short:
See rydex bull bear ratio nasdaq Apr 2010
Source: Tick Tock in Tech
The last and only time this ratio was higher than 4:1 was in early January of this year – just as the market formed a top. It is difficult to gauge whether the ratio will hold here or if it will be pushed higher as it has been for the past year. In either case, there is no question that we are seeing an extreme level of complacency by these market timers.
Option Sentiment
The option traders have mellowed out a bit and are no longer willing to sell their first-born for a call option. But even though they are coming down to more reasonable levels, make no mistake, this is a very very bullish position:
See ISE sentiment 10 day moving average Apr 2010 last
According to trading on the ISE, for the past 2 weeks, retail option traders bought on average 204 calls per 100 puts. Even the sharp drop on Tuesday – the largest single day drop for some time – didn’t really scare them. On that day, they still bought 183 calls for every 100 puts.
The CBOE option market confirms this. The CBOE’s equity only put call ratio (10 day moving average) is only 0.517. While that is slightly better since it bottomed out at 0.446 in mid April, it is still indicating an inordinate amount of enthusiasm for the long side:
See cboe equity only put call 10 day moving average Apr 2010 last
May 1st, 2010 at 7:02 pm
[...] http://www.ritholtz.com/blog/2010/05/sentiment-worries/ http://pragcap.com/sentiment-remains-bullish [...]
May 5th, 2010 at 11:08 am
[...] accurate contrarian indicator. History suggests that the proportion of optimistic stock pickers increases just as the market begins to turn. Basically, investor psychology tends to lag major inflections, [...]