SENTIMENT IS BECOMING TOO BULLISH
By Carl Swenlin, Decision Point
One of Thursday’s stories on CNBC.com had to do with some pros getting out of stocks because sentiment is becoming too bullish. Bullish sentiment can be a sign that an important market top could be lurking just around the corner, so let’s look at one of our sentiment charts to see how bullish things are getting.
The American Association of Independent Investors Investor Sentiment poll shows that the percentage of bulls has been running around 50% for the last four weeks. More significant is that the percentage of bears has shrunk to under 20% for most of that same period. The result is that the ratio of bulls to bears has been unusually high compared to most readings going back into 2005.
While sentiment has reached very bullish levels, we can see on the chart that this will mean different things depending if we are in a bull market or a bear market. Note the high bull/bear ratio at the end of 2010 did not really nail a market top. Rather the market did continue higher and an important price top did not occur for several months. Conversely, the bull/bear ratio peaks in October 2007 and April 2008 nailed the top of the bull market and an important bear market top respectively.
So, should we be concerned about the current high readings of the AAII bull/bear ratio? Currently, our objective measures tell us we are in a bull market, so we have to assume that bullish sentiment is not necessarily a problem. Of course, this could be the top of the bull market as we saw in October 2007, but we have no way to know that at this point.
Bottom Line: High readings of bullish sentiment do not always announce major price tops, but it is a flag that says perhaps extra caution is warranted. While it is a shame that high bullish sentiment is not a highly reliable top picker, I think it is useful to understand that we must interpret extreme indicator readings in the context of the kind of market, bull or bear, in which they appear.
We are in a secular (long term) bear market so this reading indicates a market top
Big wars are just a tipping point away, and you think we head into deflation longterm?
Did we ever had bearmarkets during WW1+2?
That why these wars are being brought to us, to prevent economic collaps and to artificially create new demand through destruction, to reboot the money system/ economy.
The system only works with continuos growth (even though Cullen ignors this when he talks about a balance sheet recession by the way a nice expression to ignore the demands of the money system).
But thats not possible when indebtedness/ overproduction and market saturation occur simultaneously…like in the endstage of a monetary cycle we are in now, like we were in 1930 or in Europe 1912.
I know Peter Schiff is not one of CR’s favorite, but he strikes a popular note on risk taking in the attached. Greenspan and Bernanke will be text book studied for many many years, and history will not be kind to them.
http://www.businessinsider.com/waist-deep-in-the-big-muddy-2012-1#comment-4f23e1c6ecad04203400002d
Have people not yet realized the stimulative effect of fresh printed money. I mean, it’s just like a drug – you get that high, you start to come down, and the next time you need even more to get that same high.
Eventually though, the drug stops working and kills the user. We’re not quite there yet. The debt credit card is at about 50% before people realize the jig is up and we have to wipe the board clean and start over.
From one of the 29 blogs recently recommended,
A more detailed/action oriented version of be greedy when others are fearful and viceversa
http://www.distressed-debt-investing.com/
In early December, I wrote
“But with everyone painting a doomsday scenario, I’m not quite sure that will happen. The market is NOT ready for a sustained bullish rally – too many investors are flat or are running with a low gross exposure. The only thing that I’ve known to be true in macro prognosticating: The market will move in a way that hurts the most people at anyone time. If everyone is long, it will go lower. The pain trade today, surprisingly, is up. ”
Since then everything is up except: Credit, distressed, equities, Italian bonds, etc. As I am oft to do, I point to Howard Marks’ view of the risk spectrum as a pendulum. I visualize this as 5 points on a pendulum:
1. When the world is extremely bearish and you can buy most things indiscriminately for a sizable gain. At these times, your friends call you a lunatic / maniac and are one of the few buyers out there (November 2008 is the prime example)
2. When the world is bearish, there are more buyers, and risk assets will still produce a better than commiserate return for the risk underwritten
3. When markets are fairly valued and the bulls and bears are equally on the side of the fence. At this point, investors are taking return for the exact amount of risk
4. When markets and the world are bullish, assets are becoming fully valued, and really the best strategy to employ here are event driven ones like merger arbitrage or liquidations (LBHI) that remove market risk from the equation. Here you start to see short squeezes
5. When markets are fully valued, everyone is a buyers (except for you hopefully), and you are playing with fire by buying any risk asset
We moved very quickly from point 2 which I felt represented a lot of the 3rd /4th quarter of 2010 to point 4 (or maybe a 3.75 if I was exact) which I would characterize now. We’re no where close to 5 – there are still too many bearish people out there but we are at a point where I am definitely a better seller of risk assets and am instead focusing 100% of my time on special situations (I would characterize the EK DIP as such, as well as a few other distressed situations).
The high yield market, as measured by the CS HY Index, is up 2.62% YTD. CCC/Split CCC is up 5.75% year to date(!). Yesterday was one of the stronger days I can remember in high yield with buyers of everything and very few cash sellers. It felt like a panic really to be long risk, especially down the credit spectrum. High yield recorded $1.9b of inflows last week which I am sure will push prices up higher. As inflows push bids up, the HY market shows higher returns, which makes retail investors (read: dumb money) chase returns further propagating the cycle. With the Fed on hold until 2014, the appetite for yield seems insatiable right now.
I am generally early (like most value investors) so do not take this post to mean I am sitting on my hands waiting for the market to turn. I continue to do work on special situations (in and out of bankruptcy), and see value in certain structures (I am still working through Petroplus). In fact, one of my largest positions (at least in my personal account) is a bankrupt equity that I plan to post on the DDIC sometime in the next few weeks with a possible 5-10x return with minimal downside.
The one word to describe my sentiment: Cautious.
Not a bad idea to save the list!