A NARROW MARKET IS A DANGEROUS MARKET
The melt-up continues today as “buy the dip” has turned into “buy the rip”. David Rosenberg is dusting off Bob Farrell’s 10 rules as the market soars:
Not only have sentiment indicators flagged a high level of investor complacency but also the equity market looks highly overbought right now. Looking at the internals, there is much less buoyancy than there is on the surface. As an example, back in April there were at least 600 stocks on the Big Board making new highs versus around 180 right now. Moreover, back at the April highs, we had well over 90% of the S&P 500 universe trading above their 200-day moving average and currently that share is barely above 70%. Keep these metrics in mind when judging the health and breadth of the overall market, and be sure to dust off Bob Farrell’s Rule 7: “Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.”
But let’s not forget Farrell’s first rule either:
1. Markets tend to return to the mean over time
The Nasdaq 100 has rallied 21% in 7 weeks. The Russell 2,000 has rallied 20% in 7 weeks. These are your greed indices. The ones where the pigs go to die at market peaks. At the May peak , the Russell was 10% from its 50 day moving average while it is 9% from its 50 day moving average today. The Nasdaq 100 was 6.5% from its 50 day moving average in May. Today it is 9.5%! This does not spell impending doom, but the 3 month risk adjusted returns from such a level are very poor.
The risks just strike me as being extraordinary at these levels. Complacency is high, everyone is bullish, everyone buys every dip, all the news is good, etc. The pool of greater fools has gotten mighty crowded and my hands are starting to get pruny. I wouldn’t buy this market with my worst enemy’s nest egg.
The fact is not a lot of people are bullish, we have continuous funds flowing out of equity mutual funds, and I thought you said days ago that higher percentage of stocks trading above 50DMA is a sign of trouble, now complaining about too few stocks making high? What gives? See, this is the problem with bears, searching for anything to justify their opinions. Rosenberg is totally discredited in this huge bull run, he is just denying that his judgment was wrong.
Do you always run in traffic without a helmet on?
Sorry, if my posts hurt bears’ feeling, I just want to come to read the bearish views to see if my position is wrong, so far, I can’t find any credible argument. All I see is a group of would-be bulls begging for the market to crash, this makes the market hard to come down.
and I would be very glad if the market comes down because I have lots of dry powder to buy more.
@ non_econonomist
Well, go to http://www.tradersnarrative.com/
and see what the guys there propose. They are unbiased and were long on time. Now I have seen 1-2 posts about turning bearish with a similar timing to TPC.
Hubris is a horrible thing. You seem to be interested in pegging me as a bear even though I am on record stating that I was bullish in early September and that my metrics were all pointing to a higher market. That position has now changed.
It’s not my bias. I don’t have an emotional attachment to any of this. I am just relaying my opinion and what the stats tell me. Risk is very high now in my opinion.
Already saw these kind of arguments… when we were close to market tops…
In the last week since I started getting vocally bearish I swear I could literally write many of the same posts I was writing in April of this year….The parallels are frightening.
I also see signs that a correction is due in the next couple of months. When fear is low, risk is high.
Sometimes stocks fall for no reason, outside the fact that they are over-stretched. If you read financial news it’s puzzling to see how explanations can made out of nothing… “stocks gain on Fed speculation”…. “stocks fall on Fed speculation”. The underlying fact is almost irrelevant in the short term.
Long term, it’s a different story.
If you’re looking for a couple bearish points:
- Unemployment is only a couple ticks away from the highs earlier this year. I don’t believe in the 20%+ “true” numbers but suffice to say there are a ton of people underemployed as well. QE will do absolutely nothing to alleviate this situation. The unemployed don’t buy iPads unless they’ve also stopped paying their mortgage.
- Part of this rally has been fueled by the decline in USD. When 95% of traders are bearish, best to get on the other side of the trade. Europe will intervene if we go sizably above $1.400. I don’t see how the S&P continues rallying into a strengthening dollar
- Why aren’t financials participating if this rally is real? BAC is making fresh new lows seemingly daily. Without a healthy banking sector, I question how far we can advance.
- The technicals are horrible. In addition to what TPC mentioned, this rally has created seven or eight gaps in the S&P. Those gaps will eventually fill thru lower prices. Volume has been even lower than the poor volume we saw in the April run up. Any professional trader looks at low volume surges with suspicion. We’re also setting up a double top to the April highs. I pray we get up to 1200-1220..doesn’t get much easier than to short from those levels.
Care to respond?
In the meanwhile, keep buying. Your panic selling will only drive prices further down.
TPC,
Has Bill Miller EVER been bearish? He does not address a single macro headwind in that 30 minute CNBC interview. Not a one. In the land of mark-to-makebelief, Rogers nails it when he asks what book value of any of these major banks is. If that’s the best the mutual fund industry can produce, wow!
I also give John Paulson six months before he turns bearish again. No way can he sit thru these losses on BAC and not question the premise of his reflation trade.
i’ll give jeff saut a bit of credit for once. this looks like performance anxiety and chasing, nothing more. this can and will turn on a dime
The market is struggling to break out as well. The SPY is bumping its head at 118.50/119 and then selling off. I think we will trend higher, but we need to pullback first. Too far, too fast and based on nothing more than QE.
Harold – just like last year.
Some of these rules stretch my depth of understanding, so I’ve picked 3 others that have served me well.
Pigs get fat, hogs get slaughtered
Never be afraid to take a profit
If something cannot continue, it will stop
BUY THE DIP! QE IS COMING!
How many more times can we rally on the same exact news? Who are the idiots that don’t know earnings are good and QE is coming? You buy BEFORE this becomes widespread knowledge.
Don’t fight the Fed dudes. They want the market higher, they’ve said so. You know it’s rigged so just go with it.
About not using your worst enemy’s nest egg to invest in this market.
To the contrary, Bill Miller, Legg Mason, would use his BEST FRIEND’S nest egg to invest in this market.
I like your quote about not using your worst enemy’s nest egg to invest in this market.
Sorry but I have to look at the market with a completely different view i.e. the one from a foreigner. I explain, when I look at the US market via let’s say the CDN dollar what do I see ?? Well this market has not even started to go up yet. The US dollar use to buy 1.65 CDN dollar now they are at par. Conclusion, those thinking that this market has room to fall off the cliff in a big way are out to lunch. What double dip? Well it has already happen cause for those outside, we buy US equities at a double bargain price. Thanks again !!
News flash for Canadians – the US stock market is controlled by US investors who invest with US dollars.
A close today at or above 1180 is almost guaranteed. I’ve seen this play out too many times. Move lower, go negative, rebound huge, stick save in final 30 minutes to finish higher.
This market is so predictable. Wait for it. It will get gunned in a few minutes. We’ll close solidly positive on the day.
Captain America shoots…he scores!
Last three comments disappear, and they were good ones. Where’d they go?
Not sure what you mean here?
Missing comments… sorry, they returned after about 10 minutes. At the time, this post went from 19 comments, to 16, and then back. Whatever happened, it’s gone.
The thing I find hard to gauge is how technical forces are offset by the declining value of the dollar. For example, a couple of days ago, the S&P 500 closed just slightly more than 2 standard deviations above it’s 20-day moving average. In the summer of 2009 as the market marched upward, nearly ever time this happened we had some sort of minor drop over the next two to three weeks — just a little breather in the ongoing advance. Likewise, I have some charting software that calculates MACD (which I have to admit I don’t completely understand) for the S&P and the chart looks very similar now to how it did in late April and early May before things rolled over. If you couple that with other measures like the high level of bullishness by individual investors (mentioned in another article on this site), it just seems like the rally is a little tired and the index is about to roll over for a couple of weeks. Yet, every day I hear that the dollar has lost more of its value and stocks climb in response. It’s like the value of stocks has nothing to do with the actual, underlying value (stream of future cash flows) that the companies they represent are expected to return to shareholders. It’s simply a matter of how much our currency is debased. So I have a short position because I can’t see going long in light of all that other evidence, but it loses a little bit more every day. It seems like all the other factors should be ignored and just replaced with a glance at the dollar index futures. Is it really that easy? Should I just start studying forex and give up on all this other stuff?
dear TPC,
shouldn’t it be “i would be very interested to buy this market with my worst enemy’s nest egg” instead of the opposite, given what you stated? lol
freudian slip perhaps, monsieur?
just trying to lighten up =)
anyway, i just find it odd that risk assets (equities, commodities) and safe havens (treasuries, yen and perhaps gold*) are up this quarter- while i’m sure the USD has a great deal to do with it, I’m wondering how long can this last.
*gold has always been funky to me because it is a commodity by itself, a safe haven like treasuries and also as a alternative currency