Guest post by Lance Roberts of Streettalklive.
The markets have been rallying over the last month, due not to expectations of a recovering economy but“hope”, yet unfulfilled, of further balance sheet expansion programs from the Fed and the ECB. While each Central Bank meeting and EU Summit has come and gone with “no action”, market participants have ramped up the “risk on” trade, expecting action at the next meeting. During this time, as the markets salivate in anticipation of the next round of “globally injected goodness,” the bullish arguments for the market and the economy have continued to grow.
“Developments over the past few weeks have reinforced our view that US growth will improve modestly. First, the temporary negatives—the inventory cycle, the weather unwind, and the potential seasonal adjustment distortions—are now clearly behind us. Second, the housing recovery is picking up steam, with a sharp increase in the NAHB homebuilders index (the best short-term leading indicator of housing activity) and ongoing improvement in house prices. Third, real disposable income has continued to recover and is now up 4% on a 6-month annualized basis; this pace is unlikely to be sustained as the stabilization in oil prices feeds through into retail energy prices, but the gains do provide a basis for somewhat better consumer spending. And fourth, financial conditions as measured by our GSFCI have reversed all of the tightening that took place in the spring and now stands at the easiest level since August 2011.”
On “overvalued, overbought, overbullish” markets. By Hussman Funds.
As of Friday, the S&P 500 was within 1% of its upper Bollinger band at virtually every horizon, including daily, weekly and monthly bands. The last time the S&P 500 reached a similar extreme was Friday April 29, 2011, when I titled the following Monday’s comment Extreme Conditions and Typical Outcomes . I observed when the market has previously been overbought to this extent, coupled with more general features of an “overvalued, overbought, overbullish, rising yields syndrome”, the average outcome has been particularly hostile:
“Examining this set of instances, it’s clear that overvalued, overbought, overbullish, rising-yields syndromes as extreme as we observe today are even more important for their extended implications than they are for market prospects over say, 3-6 months. Though there is a tendency toward abrupt market plunges, the initial market losses in 1972 and 2007 were recovered over a period of several months before second signal emerged, followed by a major market decline. Despite the variability in short-term outcomes, and even the tendency for the market to advance by several percent after the syndrome emerges, the overall implications are clearly negative on the basis of average return/risk outcomes.”
Guest post by Macro Story.
The weekly AAII investor sentiment survey saw a major shift to those with a net bullish view. Those with a bullish view over the next six months rose to 48.9% from 40.6% the prior week. Those with a bearish view fell to 17.2% from 30.9% the prior week.
The bearish sentiment next to December 22, 2010 is the lowest since at least 2005. Notice on the chart below which uses a five week moving average to smooth out the noise that prior reversals in sentiment have preceded sharp declines in equity prices.