One of Wall Street’s “Biggest Bears” Throws the Towel

Recently we have come across one of those forecasts that are a dime a dozen these days, and usually escape our attention. The article at Marketwatch, entitled Bull could run 5 more years, carry S&P 500 close to 3,000only seemed interesting because the forecast sounded a bit extreme. We quickly scanned the headline, thinking that whoever was making this assertion surely hadn’t breathed a word about this when the SPX traded at just below 670 points in March of 2009. Such wildly bullish forecasts are strictly a function of SPX 2000 in our opinion, on a par with the “Dow 36,000” forecast, which gained some notoriety in the late 90s. One of the reasons behind the SPX 3000 forecast mentioned in the article did amuse us greatly though, namely the following:

 

They cite extensive deleveraging in the U.S. as well as the uneven global recovery among other reasons why “this could prove to be the longest U.S. expansion – ever.”

 

(emphasis added)

Extensive deleveraging! Right.

 

CHART-1-total US credit market debt owed“Extensive US deleveraging” in one comprehensive chart – click to enlarge.

 

However, in the meantime we have found out via Barry Ritholtz that the man making the prediction was hitherto apparently “one of Wall Street’s biggest bears”:

 

Until not so long ago, Morgan Stanley’s Adam Parker was one of the most bearish analysts on the street. […]

Following last year’s 30% S&P 500 rally, he has had a change of heart. He now has a 3000 upside target for the S&P 500.”

 

This background information actually does make the forecast a bit more interesting. It is yet another indication that bears have really capitulated across the board.

 

Recent Data – Yet Another Record Falls

In this context, take a look at the most recent Investor’s Intelligence survey. Not only has the bull-bear ratio been at a 27 year high for two weeks in a row (i.e., a reading last seen in 1987),  but the percentage of bearish advisors has actually declined to a record low (as far as we know it was never lower) – only 13.3% of all advisors surveyed by II still declare themselves to be bearish:

 

CHART-2-II-ratioThe II survey exhibits the lowest bear percentage ever – click to enlarge.

 

This is of course in line with the other sentiment and positioning data we have frequently discussed in recent weeks, such as the extremes in the Rydex ratio (currently the Rydex bull/bear asset ratio stands at 17.75, i.e., it has surged back to a level close to the recently recorded record high of 18.51). Volatility and trading volume are both exceptionally low as well.

Interestingly, although margin debt has expanded again after its initial dip from the all-time high recorded earlier this year, it only managed to rise to a slightly lower high. This is an especially interesting divergence, as a roughly similar sequence has occurred near every major peak: first, margin debt expansion “goes parabolic”, then the total amount outstanding begins to dip a few months ahead of the peak in prices, and subsequently doesn’t manage to make it back to its cyclical high. Interestingly, in spite of margin debt rising to a lower high, negative investor net worth is at a new record –  a sign that the cap-weighted indexes are masking internal weakness. This is of course confirmed by other technical data which we have recently discussed (see “Internals Are Weakening”).

 

CHART-3-NYSE-margin-debt-SPX-since-1995NYSE margin debt bounces to a lower high after peaking earlier this year. Note the similarities between the last three parabolic advances in margin debt (chart via Doug Short) – click to enlarge.

 

CHART-4-NYSE-investor-credit-SPX-since-1980Negative investor credit balances reach a new record in spite of the SPX reaching a new high and overall margin debt only rising to a lower high – this means that the average portfolio held by investors must be weaker than the cap-weighted indexes suggest – click to enlarge.

 

Finally, here is a long term chart of the NAAIM net fund manager exposure survey. What makes this data point interesting is that the recent pattern – i.e., the divergence of net exposure to prices – has been following a path that is by now beginning to look eerily similar to that of 2006-2007:

 

CHART-5-NAAIMNAAIM survey of net fund manager exposure (replies ranging from “200% short” to “200% long” are possible). The divergence with the SPX is by now very similar to that seen in 2006/7 – click to enlarge.

 

Conclusion:

The so-called “wall of worry” is certainly no longer in evidence. Stock market bears seem to have given up entirely. Of course this capitulation has been a process rather than an event, and has been going on for some time now. Still, new records are seemingly made every month.

Fairly brisk money supply growth and extremely low rates have so far helped the market to recover from every correction attempt, with volatility contracting ever further in the process. Keep in mind though that even when both valuations and sentiment data are at or near extremes, it is still possible to get a blow-off move as a kind of last hurrah – this happened e.g. in late 1999/early 2000.

As to valuations, while the cap-weighted indexes appear still well below the peak valuations of the late 90s bubble, the same is not true of the average stock. While in the late 90s a handful of big cap tech stocks greatly distorted the total market P/E, a great many genuinely cheap stocks were available at the time (the entire “value” universe was quite subdued valuation-wise). This is definitely not the case this time around. It seems that both sentiment and valuations are at or near historical extremes. Investors may well be sitting on a powder keg.

 

 

Charts by: StockCharts, Doug Short/Advisorperspectives, St. Louis Federal Reserve Research

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

3 Responses to “Total Capitulation of the Bears”

  • worldend666:

    The problem with the analysis above is that this time there is a steady stream of government money flowing into equities which is not subject to the whims of fund managers. This money will keep on flowing into equities regardless of what the rest of us do so it’s likely to prevent an all out rout in stock prices.

    There is also money fleeing the banking system which is looking for a safe haven in equities and the worse the banks look the greater the flow will be.

    And finally the smart money is leaving Europe and heading to the US which is likely to further levitate US equities and bonds.

    Incidentally the chart of margin debt above doesn’t look remotely like a final surge. The previous two peaks had much steeper gradients.

  • No6:

    Extraordinary central bank behaviour will lead to extraordinary investor behaviour.
    If it keeps on rainin’, levee’s goin’ to break!

  • RedQueenRace:

    “Interestingly, although margin debt has expanded again after its initial dip from the all-time high recorded earlier this year, it only managed to rise to a slightly lower high.”

    The last portion should be stated as “it [has so far] only managed to rise to a slightly lower high.”

    There has only been one data point since then and it was a relatively minor drop of a little over $4 billion, or about 0.88%. June might have been a lower high or February’s record may be eclipsed on the next release. IMO, it’s too early to call a second top.

    “negative investor net worth is at a new record”

    From where does this come? I agree that credit balances less margin debt is at a new record negative level but that is a statement of cash positions in brokerage accounts versus margin debt. That doesn’t even include all investor cash, much less net worth.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The India-China Border Issue
      Deep-Seated Racism and Happy-Smiley Hypocrites In Delhi, people of the northeastern part of India, who have mongoloid features, are derogatorily called “chinky.” It is not unusual for men in Delhi to stop their cars to proposition a random girl from the northeast for a sexual encounter, assuming her to be “loose.” Indians' ignorance about the geography of their own country, their irrationality, superstitions and bigotry have been fertile ground in these days of Covid-19. People...
  • Silver “Scarcifies” – Precious Metals Supply and Demand
      On Monday, Silver got Scarcer – and Simpler On 23 July, we said:   “Well, it’s complicated.”   The action on 27 July was not.   Silver spot price vs. September basis   Notice the big drop in the basis starting around midnight (London time). It falls from over 7% to under 2%. To refresh: Basis = Future(bid) - Spot(ask) For the first two and half hours, the spot price is not moving. So, the only way the basis can drop is if the price...
  • Best Laid Schemes
      A Really Neat Bridge   But, Mousie, thou art no thy-lane, In proving foresight may be vain; The best-laid schemes o’ mice an’ men Gang aft agley, An’ lea’e us nought but grief an’ pain, For promis’d joy! – Robert Burns, To a Mouse, on Turning Her Up in Her Nest With the Plough (in extract), 1785     Installation of the final cable support pipes on the Gerald Desmond bridge replacement. Here is a drone video of the project. [PT] Photo by...
  • Silver Explodes — But Why? Precious Metals Supply and Demand
      Explosive Days in Silver The silver market witnessed another explosive day! At midnight (in London), the price of the metal was $26.90. By 9pm, it had rocketed up to $28.95, a gain of 7.6%. This is not normal. But then, we are not in a normal world.   After several years of going nowhere and a downside fake-out in March this year, silver has come to life rather dramatically... [PT]   The Republicans are spending like drunken Modern Monetary Sailors. And...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

     
    Buy Silver Now!
     
    Buy Gold Now!