What, me worry?

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.

Irrational Exuberance in the markets: VIX volatility indicator hitting all time lows

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.

Irrational Exuberance in the markets: Put/Call ratio signalling extreme investor complacency

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.

Irrational exuberance in the markets: despite a rising S&P500, most stocks didn't participate

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.

Irrational Exuberance: The FANG's (Facebook, Amazon, Netflix, Google) have been the primary source of market strength

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?

Irrational Exuberance in the markets: investors are fully invested, cash holdings at very low level

Opportunity awaits

 

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!

3 Comments

  • Thanks for all your perspective. I’ve been apprehensive of a major correction since the Spring, but it takes some resolve to keep a large cash position when every dip in the market gets erased over the next few days!!

    Reply
    • John–my analysis is always a measurement of probability – not certainty. As such, I try to trade with the odds. But they are still just odds–in the end, if there is a higher probability for a correction (eg–based on market sentiment & seasonality), you should hold a bit of cash. BUT–that does not mean that markets will or must decline. Again–its a probability, not a fact.

      Reply
  • “In sum, it is likely that the end of the summer rally is near. New-York is slowing down and pulling back and a healthy multi-week corrective period is now possible. However, the longer term picture remains bullish and the recommended strategy is to purchase strong stocks on weakness”.

    $SPX: “After a strong multi-month advance a period of rest and regeneration in the low 2400 s would be healthy for this bull market. More upside surprises and new all-time highs should then follow.”

    $TSX: “The bulls and bears are about to battle over the 14,900 level on th S&P/TSX composite index. With some signs of renewed internal strenght, the odds are improving that the bulls will be victorious. A rally that exceeds the 50-day Moving Average and turns that Average upwards will be the first sign that the bulls are finally turning the tide”

    Ron Meisels comment: 14/08/2017

    Any comment on that market update?

    good day

    Reply

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