Downshifting from Ludicrous Speed

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 has in my opinion the most reliable ensemble of investor sentiment measurements and the ones that matter the most are at an extreme.


Smart and Dumb

“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’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