“Who is left to buy” is a rhetorical question of course. But for those not understanding the implications of rampant bullish sentiment, its a quick and easy explanation.
Investor Sentiment is an inverse indicator. The greater the positive sentiment the higher the risk and odds of a market pullback. Peaks in sentiment don’t have to mean the rally will come to an end but it usually implies there will be at least a pause. And, more frequently a sell-off great enough to instill fear back into the market place. As the saying goes: “If this was easy, everyone could do it.”
Adding to the list of extreme sentiment indicators is the National Association of Active Investment Managers. According to Sentimentrader.com the average manager is now 94.6% exposed to stocks along with a very low standard deviation which means there’s a whole lotta group think goin on.
There there is the Investors Intelligence (add joke here) Bearish Percentage: 15% That is a level only achieved three times since since 2008 and in each case there was a moderate pullback.
Brad Pappas
No positions
Investors not satisfied enough with a +23% gain on the S&P 500 they want Ludicrous Speed!
All is not quite copacetic on my stock trading screens, there are two factors that are giving me some angst:
1. The small cap dominated Russell 2000 index is losing relative strength compared to the 100 largest stocks as comprised in the OEX index. For the past couple of weeks my trading screen is green for the Dow and the S&P 500 but negative for the Russell 2000, this is not a good sign. The Russell has been leading for a solid year and while our returns remain strong I’m seeing underlying erosion in the breadth of the market’s never ending advance.
As the chart below reveals the market for small cap stocks is rolling over and could likely be a precursor of a larger market pullback sometime soon. On a positive note: all of the economic timing systems we follow show continued economic growth with miniscule odds of a recession within the next 9 months. Its likely that any pullback, if it occurs will be modest and not the Bear Market variety.
2. Investor Sentiment: There have been very few times in recent memory where my ensemble of sentiment indicators are in the uniform opinion as they are at present. Too much euphoria and not enough fear.
Citi’s Tobias Levkovich in an 11/3 briefing: “The Panic/Euphoria Model is sending a clear warning sign of substantial complacency.”
Jason Goepfert at Sentimentrader.com has in my opinion the most reliable ensemble of investor sentiment measurements and the ones that matter the most are at an extreme.
“Smart Money is clearly becoming more defensive while the infamous “Dumb Money” continues to close their eyes and press the buy button.
On a shorter time scale Sentimentrader.com’s Intermediate term oscillator has shifted to ludicrous speed as well.
What to do now? Time to raise some cash and in certain instances modestly hedge our portfolios. We’re taking a hard look at our existing holdings and curtailing long purchases. We’re very fortunate to have few tax losses to take but we do have several holdings that have been lackluster and are candidates to sell.
We seldom use inverse exchanged traded funds, but in my judgement now is a good time for their consideration. While I may think this market is running on fumes, we only intend to use them in modest amounts since the underlying trend for stocks remains higher and no recession is imminent. Or, just enough to soften the pullback should it emerge.
If you’d like more detailed information please contact me directly.
Be careful out there
Brad Pappas
No positions mentioned
