Tail Risk And The Market Bears


An unusual pattern is developing when it comes to market opinion. No one is turning bearish anymore.
The charts to the right show the Investor’s Intelligence survey of stock market newsletter writers. The green line in the top chart shows the percentage of bullish newsletter writers. The blue line shows the percentage of newsletter writers who are bullish but expecting a 10% correction first. The red line in the bottom chart shows the percentage of bearish newsletter writers.

As we pointed out in July:

It is very unusual for the percentage of bullish newsletters (green line) to come down this much without a meaningful rise in the percentage of bearish newsletters (red line). We believe the underlying belief of QE3, and its potential to boost stock prices, is the reason for this action. Newsletters writers recognize the market’s poor technical position, but they also recognize that the Federal Reserve has a printing press which it has repeatedly used over the last five years. So, they are reluctant to turn outright bearish. The presence of the Federal Reserve is affecting the overall view of the stock market.


Tail Risk And The Market Bears 2

According to the gray box on the second chart on the previous page, a core of newsletters writers, about 25% of respondents, are bearish. It seems nothing shakes them from their belief and nothing adds to this core. The other 75% are either bullish or see a small correction before bullishness resumes (top chart, previous page). The marketplace no longer thinks tail risk exists. We noted this last month.

The chart to the right shows the 26-week range of bearish newsletter writers. It is calculated by taking the highest percentage of bearish newsletters writers less the lowest percentage of bearish newsletters writers over the previous 26 weeks (gray box, second chart, previous page).

The Investor’s Intelligence survey was started in 1963 and the range of bearish newsletter writers is now at its lowest point in the last 50 years. Again, this highlights the core number of bears is unchanging.

Source: Bianco Research

Category: Markets, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

3 Responses to “Tail Risk And The Market Bears”

  1. rd says:

    Investors are being conditioned to believe that Congress will not enact austerity despite the bluster and that QEPerpetual by Ben Bernanke is setting an ever-rising floor on asset prices. I believe the markets believe that interest rates can’t rise because Treasury and the Fed will not permit it due to the impact on the federal budget because of rising interest on borrowing.

    Failure of one of these assumptions would trigger a bear market. Failure of all would probably set a new bottom to the current secular bear.


    BR: Not sure what you mean by “being conditioned” — thats kinda squishy. Care to elaborate?

  2. rd says:


    Every time the market burps or hiccups, the Fed comes out with some new version of QE that pumps more money into the financial sector maintaining very low to negative interest rates. Some of that drifts into the actual economy, but it appears that most of it just continues to circulate in financial circles maintaining financial asset and most commodity prices high. It is not a good sign that federally-guaranteed TBTF financial firms are a major reason why the S&P 500 had a good year this year while many firms that are not federally backed struggle. It was not accidental that unremarkable retail sales this Christmas season occurred despite having had several years of “recovery” under our belts. A complete breakdown of QE being able to get money into the real economy would be a major assumption failure as investors have been assuming that QE has done something other than just boost financial asset prices to date – a disconnect between asset prices and underlying activity usually does not end well once people decide they need to head to the exits.

    If cash paid 2% interest in a savings account and 10-yr Treasuries paid 4% would we see anything close to current S&P prices even if earnings were the same? Yet these interest rates would still be relatively low compared to historic norms, even considering relatively low inflation today. Investors appear to believe that either the Fed will continue their QE policies for longer than the Fed says or that QE will actually increase economic activity significantly over the next 5 years in order to justify current valuations. How much evidence is there for the latter at this moment?

    Similarly, European style austerity to match the rhetoric of the deficit chicken hawks would likely slash GDP by 2% or more crushing short-term demand and corporate earnings. We are hearing lots of bleating from the right wing about cutting spending but so far there has been little put on the table of concrete recommendations. It appears that the 2012 election will put the fear of dramatic federal government austerity to the side over the next couple of years. However, investors may be ignoring state and local government tax collection problems, underfunded pension/medical plan risks, and spending austerity that have been having a significant impact on overall government spending. The fight over Hurricane Sandy federal financing will be a strong hint along those lines as to whether or not the short-term federal to local spigots will be fully open over the next couple of years (BTW – it would be nice to have a real debate on some of the spending requests for Sandy but it is unlikely that a real debate is possible on this).

    I think investors have also been overlooking the quiet infrastructure austerity where completely broken budget planning processes have made it difficult to do real infrastructure investment. There is no such thing as “shovel ready” public works projects other than some repaving and painting. Everything else takes a year or more of planning, permitting, design, and procurement. That means that real public works projects need to be developed and budgetted using 3-10 year capital and 10-50 year maintenance timeframes. I have stood under bridges looking up wondering how they are still carrying traffic. Similarly, facilities that are not conducive to politician ribbon-cutting ceremonies like updated water and sewer lines are failing at an alarming rate.

    Investors (or should it be traders?) are focusing on just the ability to come to any sort of budget agreement as a major positive but it is likely that continued poor contents of these agreements will continue to deteriorate the US’s competitive position over the next few years. I don’t think this is priced into equity markets at this time.

  3. DeDude says:

    I guess that newsletters survive by telling their readers what the readers want to believe. If you start telling your readers the opposite of what they want to hear they stop reading you and you can quickly be out of business. Most people prefer to believe that their investments will be successful so more newsletters are bullish. As an investor you should probably get one of each and then at any given time see whether the bull case or the bear case is the most convincing.