This blog is taken from an email update I recently sent to clients and to our subscribers — you can subscribe to our free email newsletter here.
Risk on capital assets has – apparently – disappeared. The stock market and real estate market sees no risk in the near or distant future. Real estate prices are slowing, and sales are off. But prices haven’t flinched too much from arguably bubble highs in most large Canadian cities.
Stocks in particular reflect the current belief that there is no possibility of a correction. We all know how that attitude leads into trouble. It’s like wearing a seatbelt. You do it because you are not immune to car accidents. No matter how good a driver you may be. You really want to buckle up in a snowstorm, and have an airbag too. Yet the stock market refuses to wear a seatbelt right now – despite the weather report showing a probability of snow. Perhaps it will make it home alive. Or, perhaps the stock market’s head will end up through the windshield. Time will tell
Here are some signs of irrational exuberance on the markets-some of my comments are made with my tongue firmly planted in my cheek:
The VIX-which is an indication of volatility-it recently hit all time historic lows! The VIX tries to price in future risk via monitoring option trader behavior. “Normal” levels for the VIX is usually in the mid – teens. The recent level of 9.5. suggested no possibility for stock market risk. None. It just doesn’t exist anymore. Mind you, with the recent war talk, the VIX has spiked to 15. That shows you how quickly this market might turn down.
Put/call ratio: On the subject of risk, the Put/Call ratio shows us how many “put” (protective) options are trading vs “call” (bullish) options. The ratio recently showed an extreme level of complacency – and that’s bad. Too many bulls buying calls, too few protective puts being bought. There’s just no risk, you know. Gosh, no.
Breadth-Market: shows you how many stocks are participating in the bull market. The number of new highs vs. new lows by stocks making up the index have not backed the new highs on the S&P 500. That means – despite a rising index – most stocks didn’t participate. It’s been a one-pony show.
FANG’s: The pony I mention above has a name. Its FANG. And FANG (Facebook, Amazon, Netflix, Google) could do no wrong. These stocks have been the only game in town – per the Breadth comment above. They drove the market up. Are they in danger? Not yet, but they better not break their support levels.
Record low cash-Investors have less cash in their investment accounts that mirrors pre-correction levels seen in 2011 and 2015 (AAII study – compliments sentimentrader.com). Investors have no reason to hold cash right now. There’s no risk, remember?
Many of our clients have been with us for a long, long time. Many people have been reading this blog or watched my BNN shows for a decade. They know my style. Sometimes I sit and wait, and underperform for a while. I hold cash while others gleefully pile into the market. Sometimes I’m wrong and wish I’d bought. Yup, it happens. But when I’m right – I’m right. Our best years at ValueTrend are always during times when markets act irrationally. I feel this is one of those times, so we’re up to 40% cash (plus 5% bonds) in our ValueTrend Equity Platform right now. I certainly can’t guarantee you the market will fall. But if it does – I’ll be buying when others are despondently selling. I’ve done this before.
Buckle up, now!