Hussman of Hussman Funds notes some rather interesting signals in his latest weekly market update.
As of Friday, our estimates of prospective return/risk for the S&P 500 have dropped to the single lowest point we’ve observed in a century of data. There is no way to view this as something other than a warning, but it’s also a warning that I don’t want to overstate. This is an extreme data point, but there has been no abrupt change; no sudden event; no major catalyst. We are no more defensive today than we were a week ago, because conditions have been in the most negative 0.5% of the data for months. This is just the most negative return/risk estimate we’ve seen. It is what it is.
Since we estimate prospective return/risk on a blended horizon of 2-weeks to 18 months, we are not making a statement about the very long-term, but only about intermediate-term horizons (prospective long-termreturns have certainly been worse at some points, such as 2000). As always, our estimates represent theaverage historical outcome that is associated with a given set of conditions, and they don’t ensure that any particular instance will match that average. So while present conditions have been followed by extraordinarily poor market outcomes on average, there’s no assurance that this instance can’t diverge from typical outcomes. Investors should ignore my concerns here if they believe that the proper way to invest is to bet that this time is different.
Guest Post by The Technical Take.
April Fools! That is what it feels like when investing in this market. If you put money to work now and the market tanks, you feel like a fool. If you sit on your hands and watch the market levitate higher week after week, you feel like a fool. If you do jump in and the market goes higher, it is likely that you will need to be very nimble to lock in those gains as the best, most accelerated gains are behind us. What is an investor to do? You cannot win. In the end, the markets are a zero sum game, and we are all fools anyway! Ughhhh!
The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator shows extreme bullishness.
Guest post by The Technical Take;
I am not sure why this time should be different. Seriously. Yes, I have read all of the internet want to be commentators that claim all market analysis is useless especially in this environment where the central banks of the world have flooded the markets with liquidity. Stocks just cannot go down and suggesting that they might is well blasphemy. But I think the data does matter and it will matter. At some point, there will be a tipping point. Are we close to that event? We are closer than we were 4 weeks ago as different data sets are consistent with price fatigue.
So let’s start with investor sentiment. As we know, the “dumb money” indicator shows too many bulls. See figure 1. While most would interpret this as a bear signal, I have repeatedly stated that “it does take bulls to make a bull market”. So I am comfortable with the notion of too many bulls. We should expect to see this indicator at a bullish extreme.
This rather extreme prolonged Santa Rally has made people frustrated over the last weeks. The many conflicting themes of the Economy, the Euro mess, the collapse in volatility etc, is contributing to people’s frustration over where the market should be going. Currently we see great accumulation of a bigger move coming up due to “skewed” psychology of the market. Meanwhile some fundamentals from Hussman.
Goat Rodeo – Appalachian slang for a chaotic, high-risk, or unmanageable scenario requiring countless things to go right in order to walk away unharmed.
Over the years, of the most frequent phrases in these weekly comments has been “on average.” Most of the investment conditions we observe are associated with a mix of positive and negative outcomes, so rather than making specific forecasts about future market direction, we generally align our investment position in proportion to the average return/risk outcome, recognizing that the actual outcome may be different than that average in any particular instance.
AAII Investor Sentiment for the week ending January 11, 2012 remained relatively unchanged and firmly net bullish. Those with a bullish view over the next six months rose to 49.1% from 48.8% the prior week while those with a bearish view remained unchanged at 17.2%.
Putting these values in perspective the historic average for bullish views is 39% contrasted with 30% for bearish views.
The chart below shows the five period moving average of percent bears versus the SPX. Data has shown since 2008 decreasing bearish views are actually bullish for equities yet at extreme levels as we currently have (this is the second lowest reading in over six years) caution is warranted. Combined with the massive fall in NYSE short interest the long side of the trade appears to be getting rather crowded.
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.
We start the new year like we ended the old year: with a mixed sentiment picture. The Rydex market timer is extremely bullish, and this is a bear signal. The “dumb money” indicator is neutral and company insiders are as well. Overall, my interpretation is bearish. Sustainable price moves usually start when there are too many bears, and it is short covering that is the fuel that sparks a price rise. After the short covering subsides, sustainable price moves are typically heralded by having too many bulls willing to chase prices higher. Neither of these extreme conditions are currently present, and it is difficult to see the market embark on a sustainable price move in their absence. Lower prices would bring out more bears and this would be a precursor to a tradeble, sustainable rally. Higher prices should be supported by increasing number of bulls, and this would be a signal that a sustainable rally, that everyone so desperately wants, is unfolding. As stated above, I am betting that we will see lower prices before higher as there are few bears (i.e., no short covering) and as the time for the bulls to have taken the reigns of this market have long since past.