I spent a considerable amount of time over the last year or more talking about all the conditions across various asset classes and the high degree of correlation here versus the late 90’s. Stocks, breadth, value/growth, sentiment, positioning, false market signals, Emerging Markets, China, dollar, yen, oil, gold, etc. All set-up the same way they did in 1998, ahead of a significant run in stocks. That’s been my story all along, not once did that outlook change even into a year where even some of the few remaining optimists, changed their tune at the lows.
As we’ve hit new highs, I’ve discussed the defensive nature of most participants positioning. I’ve also discussed that as we’ve achieved this feat, the most important stat out there is that people don’t own stocks. Even the professionals. Exposure to equities reached a major low that we haven’t seen in many years. That coupled with the overall short interest keeps a bid under the market. According to all the chaos in the world, stocks don’t belong up here, but you have to realize that that opinion comes predominantly from those that don’t own any.
Lately it starting to feel as though the defensive nature of this market is starting to come off a bit. Starting to see quality and some momentum names pulling some weight as well. Breadth has hit all time highs with the indices too, which supports a healthy environment. According to my risk cycle that we discuss often, that means we’re in the early stages of something here, not at the end. It’s still quite interesting to me that the majority view these conditions as a risk, as opposed to an opportunity.
The lack of speed and correlation in the market day to day is a good sign. In fact, if you compare the market action coming out of 2011 post European financial crisis, or fall of 2010 months after the flash crash, once the market has committed to direction, the speed dies and the markets grind endlessly for weeks and months on end.
We just ended a 9 session win streak by the Dow today. Last time we had streaks similar to those were at the starting points of a significant trend.
Volatility is dirt cheap, and these conditions signal a trending market. These are the markets in which I perform best at. One should try to spend time viewing the market from a market of stocks perspective here, as opposed to a stock market. It would help immensely. Meaning, I won’t debate the gyrations of the market from here to there, but I’ll find you the best winners in this tape available.
In a couple months, we’ll revisit my “chart of the year” and the volatility compression that’s occurred in the monthly chart of the indices. Based on recent activity, one should be watching that closely for additional market velocity.
OA
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And if you need the Cliff’s Notes version of Jeff’s superb analysis: Markets don’t top when nobody owns or wants to own stocks. They top when every one wants to.
I remember in the depths of hell in Jan/Feb when I was losing confidence in the market and Jeff’s stance. Not once did he waiver. Astounding work and teaching.
Yep — bravo.
I invest more than I trade. Thanks, OA for helping me to stay long. Your views make a lot of sense and you back them up with impressive stats from previous market times.
I appreciate that.
By far, one of the most investable landscapes I can ever recall…if you look away from the SPY.
Saw $IWM showing some relative strength and threw on a YOLO. It promptly stopped showing relative strength.
Covered $SPY puts for +25%
Started $FIG calls. They command virtually no premium, so you can buy way out. I think I paid for a nickle in time premium.
Hey OA – Yeah thanks on the reply on oil. Probably should have anticipated the break down first. Looks like they’re going for that.
OA, still like TWLO here as long as it stays over 39?
Of course, love it.
Was wondering the same thing. Thanks for your take OA.
Easier to watch these stocks on 30 min charts. That way you can see when a stock trades outside of a consolidation range or trend. Easier practice this way.
Ok, last one. Got some $NMBL calls too. Now I own all of the things that I wanted from my post of a few days ago. Time to put my feet up and get out of the way. Although there are 2-3 more names I’d like to get my hands on now that I’m at my desk and poking around the markets.
Thanks OA look to you everyday. Will sign up after Ironman here in Mt Tremblant, and I can focus! Go Team Colonago!!!
Ironman? Bad ass.
“All set-up the same way they did in 1998, ahead of a significant run in stocks. That’s been my story all along.”
First of all, you deserve props: even though we both had the exact same initial reaction to the post-Brexit rally (“Not a buyer here…If we are near a bottom then the first rally always fails.”), you were still unwavering in your final destination call (all-time highs).
Secondly, I’m one of the still skeptics (no surprise). As I’m sure you know, investor sentiment is a huge driver of stock market returns in the near- and mid-term. Prrety much the whole field of Techincal Analysis is based on using price movement to read this implicit sentiment. Given that, I think it’s important to note that while I think your 1998 analogy is excellent, there is one distinction between 1998 and today: the 1998 investor had a huge bull market in the rear view mirror (10 years without a 12 month correction greater than 12%, a 20-year gain of 10x initial investment), while the 2017 investor isn’t that far from back-to-back Grizzly Bears (-45% drawdowns). This is why people are still in cash: they’ve seen this story twice before, so investors can’t be expected to react the same as they did in 1998.
So while time may tell whether this market will once again end in irrational exuberance” as they “always” do, it wouldn’t shock me if this turns into yet another “US Housing never falls” black swan to that theory.
Of course, even I’m not goign to dive in fornt of the freight train (particualrly one engineered by central bankers) and timing is everything, so I think treating the market as a “market of stocks,” is sage advice.
No, no…the prior post said “I am already 100% invested here.” Don’t forget to acknowledge that.
And I’ll argue you to death on sentiment, but conversations with you are beyond long winded that I’ll just nod and say “ok.”
Re: 100% invested as mentioned in the comments http://ibankcoin.com/option_addict/2016/06/23/ahwoa-update/
Ok, consider it acknowledged. I don’t know what your risk-managment strategy is (obviously even the best traders have some losses), so I had assummed that you reduced your exposure on the Friday after Brexit.
Also, it is worth repeating it really was impressive that you stayed bullsih after Brexit
I actually added two more positions on my next post that day: OCLR, TROX. So in reality, I bought Brexit.
I’m going to chime in here, because you are asking some of the same questions I went over during my own analysis… so maybe it will be beneficial.
You are absolutely right that investors can’t be expected to react TO THE SAME SCALE that they did in 1998. That was the final move.., in the final Cyclical Bull.., of a 25 year Secular Bull. This is (arguably) still the first Cyclical Bull at the beginning of a new Secular Bull. I would argue that it isn’t the scale of the “irrational exuberance” that is important here… but the sentimental behavior itself, scaled to the current phase of the Secular Bull we are currently in. Early innings… not the 9th inning.
On your point of back to back grizzly bear markets… I would argue that there are VERY few people active in the markets today who have actively participated in the early phases of a Secular Bull (think late 70’s and early 80’s). Anyone who has entered the markets in the last twenty years has been training in a Secular Bear… and has developed habits and bias accordingly. From a sentiment stand point, this Bull should continue (with dips and corrections along the way) until over a decade worth of Secular Bear Market anxiety has been wiped from memory… and that will probably take a while. I’ve got to imagine that investors in the 40’s and the early 80’s felt the same way… after experiencing the Great Depression Era, and the Bear from the early 60’s to the 74 bottom. Markets may grow and evolve… but human behavior has shown far more predictable.
While there are some sectors of the market I’m not convinced about myself at the moment… there are plenty others I feel much more confident about. I agree that is the sage advice about a “market of stocks”. You don’t have to trade the Indexes… trade what you like.
Sorry for being long winded… I have spent just a little bit of time thinking about this subject over the last couple years… haha.
“I would argue that there are VERY few people active in the markets today who have actively participated in the early phases of a Secular Bull (think late 70’s and early 80’s).”
That was *my* point, hence the difference between 1998 and 2017 investors.
However, I see your (longer-term) analysis as well. You are basically saying that isn’t 1998 (the last leg of a major Bull cycle), but instead the *first* leg of a Bull market exactly becuase investors are gun shy and will have trouble recognizing opportunity.
In that case, I will point out what I see as the two major differences between 2017 and the late 70s/early 80s: 1) interest rates and 2) demographics. I’ll assume that you understand the significance of these two points, but I could expand if you want.
Oil down again with oil stocks up