zondag 23 juli 2017

Sentiment Is Bullish....

Of course, investor behavior makes forward long-term returns even worse. The bulls have continually argued the “retail” investor is going to jump into the markets at any moment which, with all the “cash on the sidelines,” will keep the bull market alive. The chart below suggests they are already in. At 30% of total assets, households are committed to the markets at levels only seen near peaks of markets in 1968, 2000, and 2007. I don’t really need to tell you what happened next...


Furthermore, as I have discussed repeatedly in the past, there is NO “cash on the sidelines” to begin with. To wit: “Every transaction in the market requires both a buyer and a seller with the only differentiating factor being at what PRICE the transaction occurs. Since this must be the case for there to be equilibrium to the markets there can be no ‘sidelines.’ Furthermore, despite this very salient point, a look at the stock-to-cash ratios also suggest there is very little available buying power for investors current”...


There is no cash on the sidelines. Furthermore, the dearth of “bears” is a significant problem. With virtually everyone on the “buy” side of the market, there will be few people to eventually “sell to.” The hidden danger is with much of the daily trading volume run by computerized trading, a surge in selling could exacerbate price declines as computers “run wild” looking for vacant buyers. This thought dovetails into the “hyperextension” of the market currently. Since price is a reflection of investor sentiment, it is not surprising the recent surge in confidence is reflected by a symbiotic surge in asset prices. The chart below shows the deviation above the 3-year moving average. Importantly, at the peak of the previous two bull markets, the deviation never pushed into the 3-standard deviation range as it is currently. This suggests there is VERY little room left to the upside before some corrective action occurs...


The problem, as always, is sharp deviations from the long-term moving average always “reverts to the mean” at some point. The only questions are “when” and “by how much?”