yes, but there's a good reason for this low market vane number, namely the fact that there's a record net short position by the commercials in the spoos. the important thing is of course that the other side of this trade is a record net long position by small traders and big speculators alike, and as always, actual positioning is far more important than polls - it's a case of saying one thing and doing another. this tells me that the rally's life span is limited medium term wise. i have not denounced the market's short term rally potential - check my posts. sentiment data are anyway useless as short term timing indicators. but this year has seen historic extremes in all the data i follow. we had e.g. a record 75% AAII bulls coincident with the Dow top in January (the same measure that has seen bears drop to a paltry 11% last week, with the percentage of bears in this poll AVERAGING 16,2% over the past 7 weeks). the Rydex ratios (another positioning measure) have seen historic extremes for MONTHS, in spite of the precipitous Nasdaq crash in April. only between 8-12% have been allocated to bear fund assets since the beginning of this year, a truly unprecedented stretch of unreserved bullishness by the public. at the height of the Nasdaq mania, 91% of Rydex bull assets were allocated to tech, and the allocation is still over 75% now (at the bottom in '98, over twice as many Rydex assets were in bear funds than bull funds, and the tech allocation was a mere 20% - still much higher than tech's contribution to GDP).
as for put/call ratios, the overall CBOE put/call ratio has made a string of record low one day reading this year, and its 21 and 10 day MA's have likewise produced several record lows. at the moment, the 10-day MA tends to bottom where it used to top out in the 25 years prior to the current year. OEX p/c ratios have largely become irrelevant, as volume in OEX options has shrunk dramatically. in fact, OEX dollar put volume has likewise hit an unprecedented string of record lows this year.
so notwithstanding the short term strength of the market - which i ascribe to the printing presses doing overtime, and issuance of commercial paper reaching an annualized pace of 40% growth...all of which has driven annualized growth of M3 back to over 12% - for the medium to long term the record breaking bullish consensus of this year bodes exceedingly ill.
you know, 20% annual gains in broad stock market averages are NOT a birthright, even though many people seem to think so. in order for the bubble (it IS a bubble, even though easy Al says he can't say if it is) to expand further, the underlying credit bubble has to expand further. now at the moment, this continues to happen - unfortunately as the ratio of market cap to total money stock reaches fresh all time lows, a geometric expansion of new credit is needed to keep the show on the road. this is exceedingly difficult, with both household and corporate debt hitting all time highs, not just in absolute numbers, but relative to disposable income and equity. at the same time, trading in the stock market has reached a frantic 3,6 times of GDP - in other words, for every $1 in goods and services produced, $3,6 in stock are traded. this is another problem regarding the potential for bubble expansion: you need increasing volume to accomplish it (look at a long term chart depicting volume and price trends, it will be self-evident). how much bigger than the real economy can the stock market get? its market cap already resides at a hefty 170% of GDP - a historic world record. at the same time mutual fund assets comprise 43% of GDP - they were a mere 1,6% of GDP when the bull market began.
in conclusion, what i'm trying to say is even though we may make another attempt at new highs in the short term for the popular indices (the broad market as per the VGY topped out well over two years ago), the odds for a significant advance seem not too good. what seems to loom quite large is risk however. mind you, i'm not out of the market...but i have been very careful in picking the sectors and stocks i want to be in. i tend to think that there will always be opportunities in the market. that is to say, i am trying not to be dogmatic - what i am trying to adopt is a contrarian approach. |
