Many folks say that you can’t top when people are calling a top. A seasoned sell side technical analyst for ISI many years ago told me that he never listened to what his clients or market pundits were saying. He would say: “I am a bull…I am a bear…who gives a rats ass! How are you positioned? Talk is cheap….all that matters is how the market participants are positioned.” The sentiment indicators have been off the charts for months. The number of bulls vs. bears as measured by Investors Intelligence are at lows last seen in 1987. Many perma bears have recently thrown in the towel. More importantly shorts have been bankrupted and openly mocked on CNBC. Did any of you catch the Bill Flekenstein interview where this so called anchor mocked Bill? It was shocking. Does this mark a top? No, but it certainly speaks to the positioning of the public. The positioning of the institutional long only equity community is low on cash and high on beta. Hedge funds gross of capital invested are 170% vs. the 168% top in 2007. Then ask yourself how you are positioned? Even Marc Faber our modern day equivalent of Eeyore said he hopes to lose only 50% of his money in a crash. Think about that statement. He is always calling for a top but yet he is in the market. That is what long bull markets do. They suck everyone in and then BOOM.
My Technical analyst friend and I were talking in February. I asked him how close we were to the top? He said: “We are in the top of the ninth. I have never seen such confidence in the Federal Reserve in all my career. Apparently many PM’s believe the Fed won’t let the market go down. I was talking to one PM about the 87 crash…he stopped me and said I wasn’t born then.” So how do you think the buy side is positioned? I think everyone is long and strong. Too long to be wrong. With the Dollar strength (which is de facto tightening), QE ending and the wobbling of the credit markets equities are very vulnerable to a repositioning. Liquidity is atrocious and if everyone has the same idea at the same time look out below.
Have we seen the top or a major top? Maybe but we need more structural evidence. My biggest fear is that this unwinds very quickly due to all the manipulation and intervention by the Fed. In a battle between margin clerks and the Fed the margin clerks always win.
Watch the open tomorrow. Good luck everyone.
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Excellent observations, thanks for posting.
P.S. great photo of Jesse Livermore [who] won & lost fortunes & ultimately shot himself. Good luck to all who listen . . .
superocean9,
Jesse was manic depressive. He was the original tape watcher. He saw patterns no one else back then could see. He only felt alive when he was making money and winning. Tragic. Shot himself in the coat room of a Manhattan hotel.
I’ve felt for quite some time that the real bubble wasn’t so much in stock prices as it was in belief in the Central Bankers ability to keep the game going along with the ever expanding distribution of wealth to a small percent of the population. Probably not a popular opinion on these sites but lets just see how it plays out as I suspect this time around, when all is said and done, Joe Sixpack may not get hurt nearly as much as the Ferrari and Tiffany crowd. This time around, unlike 1987, it may not be NASDAQ market makers not answering the phone to take your trade. Next time there may not be anyone to call period.
excellente
Hi Bluestar, I respect your opinion however do you think a strong USD can be a precursor to a healthy economy. Central banks aside, economic data is trending upwards with corporations showing record profits (Nike yesterday, for example). The fed has been tapering off its bond buying program and 10 year yields and crude appear to be forming an inverse head and shoulders bottom. Gold and silver are in a downtrend and emerging markets have not broken out of there 2008 highs. If we get a gradual rate rise with an improving/growing economy and increases in corporate profits how is that bearish for equities and junk bonds? Maybe the fed was right and we are on the midst of economic prosperity in the middle of a secular bull market. Thoughts?
Jules, I’m obv not blue – but a couple thoughts on growth in a global economy:
US –
GreekFire23 @GreekFire23 · 3h
Given that quarterly GDP is annualized and calculated quarter over quarter if the economy was really at 3% growth Q2 GDP = ~8%…but its not
GreekFire23 @GreekFire23 · 3h
Y/y growth in final sales is where it was in the middle of 2001 recession, difference now is IP growth running +4%, back then it was -5%
https://www.businesscycle.com/ecri-news-events/news-details/economic-cycle-research-ecri-echoes-of-japan
https://pbs.twimg.com/media/BydkTD9IAAAxxfx.jpg:large – @dondraperclone
Today’s data is likely overestimated big time: https://www.greedometer.com/bea-follow-overstating-growth/
Europe –
http://gavekal.blogspot.com/2014/09/beware-european-cyclicals.html
Japan –
Don’t really need to add anything here
China –
Same as Japan
Proof – look at yields domestically/globally/OAS spreads/Curve spreads
Just my 2 cents
one more – US doesn’t turn around until this changes:
http://confoundedinterest.wordpress.com/2014/09/26/the-labor-less-recovery-us-real-gdp-increases-to-4-6-wage-growth-remains-at-2-1/
http://confoundedinterest.wordpress.com/2014/09/25/initial-jobless-claims-near-14-year-lows-while-m2-velocity-at-all-time-lows-and-real-median-household-income-only-at-1995-levels/
Jules, Not Blue either, but no. In the past a strong dollar could move with stocks because we had a strong economy. But, since 2009 so much liquidity flowed into the over production of Commodities due to speculation of inflation, etc and not into true demand. Now the world is flushed with excess Ore, Steel, Oil, Copper (even though China Govt or someone is supporting the price a bit by being a buyer of it right now), etc.. The worlds economy falsely believes that “Everything is Better” because commodity demand is strong and they are buying. But, as we are watching in Ore, there is no demand and once Global Liquidity stops from the Central Banks then there will be no demand for speculation in Commodities either and the mass surplus hits the global market when speculators dump their Investment. Housing won’t help us either because the move since 2009 wasn’t from homebuyers, but again speculators buying mass amounts for rentals/resale, so again no true demand. IMHO this has been one massive bubble created by the Central Banks, and one amazing bubble to watch since early 2009, but as they say, the only true rule in this game, bubbles always pop…only question is when this one will?
Thanks, but doesn’t the average wage growth look likes it bottoming. Is it possible we are at an inflection point in the economic cycle, possible early recovery stages?
I don’t believe so. which we are all entitled to view it however we choose, but imo we are just stuck in the exact same range that has kept this economy range bound since the middle of 2011. waiting for the shock to tip it over and start fresh. hopefully we don’t blow it this time like 2008.
even if we take the other side, profit margins will need to contract severely given the debt overhang and lack of savings of consumers, which isn’t priced in either. the problem, from a secular standpoint, is the insane debt overhang in the 20-30 age group largely due to education expenses, rising home prices, flat real median income. we see the effects very clearly when we look at household formation.
look at median incomes and labor make up by age bracket:
http://www.advisorperspectives.com/dshort/updates/Household-Incomes-by-Age-Brackets.php
http://www.advisorperspectives.com/dshort/commentaries/Demographic-Trends-in-Employment-Participation.php
bottom line – you can’t paper over structural issues.
also, discussing valuation, etc – very good write-up by Dana Lyons
http://www.jlfmi.com/archives_2014_05.html
Jules, We have had HISTORICAL liquidity thrown at this market since 2009 and at best it could be a “early recovery” stage. Nope. BTW for today the high risk bond market in relationship to low risk is not buying this rally at all, and IMHO is slipping thru some major support again. Yes, we have to deal with End of the Month F/X rebalance and Window Dressing, but with China going on VaCa next week our pretty sell off should start again.
Jules,
Corporate profits have peaked and the economy is actually not getting better. The recovery in profits is all due to cost cutting, a resumption of consumption due to welfare payments (US debt has doubled in 6 years) and share buybacks supported by zero interest rates. revenue growth has been anemic. this is not sustainable. the rise in the dollar is due to a looming credit crisis coming and a global recession. Peace.
The actual economy has been in the dumps for nearly a decade now… maybe the real economy is about to start actually catching up to the stock market? We do have some neat energy jobs booming and 3D printers are making things cheap for potential start-ups. Once the real economy starts catching up, that’s when the rates will have to skyrocket and we get real crashes right?
Bruce,
I love the avatar. Just love it. Would it surprise you to know that there is no correlation between rates and stock market crashes? The Fed has extended this market beyond all comprehension. Do you think they are Gods and have mastered Mother Nature and cycles? Bruce I am here to tell you they most people who manage money think the Fed is infallable. I am a heretic. I beleive in all things cyclical. What goes up must come down. Pull up the long term chart of the market and ask yourself if that looks sustainable to you. When this rubber band snaps people will be shocked at how quickly this thing goes down. I will likely be burned at the stake by Fed for my backward thinking. By the way the economy blows and is rolling over.
Bluestar,
What makes you say corporate profits have peaked? We can argue about the Fed until we’re blue in the face, but its tough to argue corporate profits.
Forget Aplha,
I am a mean reversion guy. They are at all time high peaks. Where can they go from here? My guess is lower. WHY: stock buybacks peaking, no more expenses to cut and revenue growth which appears to be rolling over. Oh yeah strong dollar not good for multi nationals.
Well I agree that cost cutting may have seen its limits, but it remains to be seen whether revenue growth is turning lower. Corporate profits were declining from roughly the beginning of 2006 and didn’t turn higher until 1Q09, which was an environment with significantly more systemic risk in the financial system, and while the Fed may have tacked on a tremendous amount of debt since, the corporate balance sheet is in much better shape since. Buybacks may be peaking, but the M&A cycle is in full force.
Also, the PM your friend was talking to wasnt born in 87′? So he’s 27 years old? Please tell me which fund has a 27 year old PM because I want to send in my resume haha.
And if you want clarification I’m looking at US Corporate Profits with IVA and CCA Total SAAR…if you want to look at the S&P then earnings starting to decline in 2Q07, headfaked higher in 4Q07, and didnt have a real bounce until 4Q08.
Forget Alpha,
Fidelity was the firm not sure of the name.
Forget alpha,
Thanks for profit info.
Fido really has a 27 year old PM? Wow, looks like I’m moving to Boston