Headlines
|
Excess upon excess as Dumb Money is smartest ever:
We're seeing yet more speculative records across a broad array of indicators, with few counter-examples. It has pushed models beyond all other extremes, with Dumb Money Confidence being on the right side of the market to the greatest degree ever.
Not so golden: Gold just ended its 5th-longest streak with its 50-day moving average above its 200-day average. Tuesday's decline triggered a "death cross" for the first time in more than 500 days. Gold, and gold miners, have not acted well after ending streaks of more than a year with the 50-day above the 200-day, putting a dent in some of the recent positives, especially for mining stocks.
Bottom Line:
See the Outlook & Allocations page for more details on these summaries STOCKS: Weak sell We're in an extremely speculative environment that is enough to become defensive, especially with recent cracks showing in what had been pristine breadth conditions. The spike in fear from a couple of weeks ago has dissipated and likely not enough to offset the negatives over a medium-term time frame. BONDS: Weak buy Various parts of the market have been hit in recent weeks, with mild oversold conditions. Treasuries have been hit hard and will likely start to register some extremes soon. GOLD: Weak buy A dollar trying to rebound from a severe short position has weighed on gold and miners. The types of signals they've given in recent weeks, within the context of their recent surge, have usually resulted in higher prices over a medium- to long-term time frame.
|
Smart / Dumb Money Confidence
Smart Money Confidence: 18%
Dumb Money Confidence: 86%
|
|
Risk Levels
Stocks Short-Term
|
Stocks Medium-Term
|
|
Bonds
|
Crude Oil
|
|
Gold
|
Agriculture
|
|
Research
BOTTOM LINE
We're seeing yet more speculative records across a broad array of indicators, with few counter-examples. It has pushed models beyond all other extremes, with Dumb Money Confidence being on the right side of the market to the greatest degree ever.
FORECAST / TIMEFRAME
SPY -- Down, Medium-Term
|
We hardly need more evidence of extremes. But some of these are so extraordinary, let's take a look anyway.
Options traders continue to get ever more aggressive. Even though this has been covered by mainstream financial media, it's still probably underplayed as a factor in the incessant rise since December. These trades have an outized impact on stock prices, and it only takes a pause in their activity to help trigger an unwind in underlying positions. As it climbs, it just piles and more snow upon a mountain that's ripe for an avalanche.
The smallest of options traders, those executing 10 or fewer contracts at a time, bought to open almost 25 million call contracts last week, versus only a little more than 6 million put options. Overall volume on the NYSE was down (more volume has been flowing into ultra-speculative penny stocks) so the net speculative purchases of these options traders spiked yet again to a new relative record.
Most of this option activity is concentrated in the very near-term, with expirations within the next few weeks. This activity has helped in part to press the VIX "fear gauge" lower in the near-term, while longer-term expectations are still elevated. This has been a sign of extreme complacency in the past.
Every time the VIX Term Structure has been this low, the VIX spiked in the weeks ahead per the Backtest Engine.
All of this focus on call options has pushed volume in put options of all types (buying and selling, opening and closing transactions) relative to call options to the lowest level since 2000.
Zooming in on the dates when the ratio was as low as it is now, it wasn't an immediate sell signal, as we've discussed before. But the price behavior tended to be choppy, with gains eventually given back.
We don't often look at the positioning among Rydex mutual fund traders anymore since their asset base has dwindled in favor of ETFs, and some fund switching services have wreaked havoc on the day-to-day swings in assets in many of the funds.
Using a moving average can help even out some of those swings, and when we look at a 20-day average of assets invested in leveraged bullish funds relative to leveraged inverse (bearish) funds, it's just now rolling over from a speculative record of more than $40 invested in a leveraged bull fund (!) for every $1 in a leveraged bear fund.
Including the plain vanilla funds that don't use leverage, the ratio of bull to bear assets is still near a record high.
Zooming in on the recent extremes, they preceded rough stretches for stocks.
Using the more common Rydex Ratio of assets in the longest-standing S&P 500 and Nasdaq 100 funds, we can go back to 1994 and still see that the current positioning exceeds anything from 1999-2000.
This kind of behavior has pushed the Panic / Euphoria Model above 1.5 for the first time ever. We saw a month ago what this kind of level has meant for forward returns, but we're already bucking those historical comparisons to a modest degree.
With so many indicators showing optimism, there are usually a couple of odd exceptions that suggest pessimism. It's rare for everything to agree at the same time. This is one of those rare times, though, with more than 50% of our core indicators showing an optimistic extreme and exactly 0% showing a pessimistic one.
This, too, has preceded some tough markets.
The Risk/Reward Table, which shows the biggest losses and largest gains at any point across the various time frames, shows limited upside relative to the downside, with 2017 really being the lone exception.
If all of this is getting a Chicken Little kind of a feel, there's a reason. The "dumb money" has been smart for months now. We looked at this concept last August, under similar circumstances. Options speculation was exploding, Dumb Money Confidence was excessively high, and yet markets kept going up.
We can quantify this failure of markets to respond as they should with a Brier Score calculation that's commonly used in other disciplines. A 3-month average of the Brier Score for Dumb Money Confidence shows that we just hit uncharted territory, meaning that the model has been failing to do what it usually does to a record degree.
The only other time since we began calculating this model in 1999 that the dumb money had been so right for so long was mid-January 2020. The other high levels also led to a reckoning.
Maybe it's all permanently broken. Maybe the increasingly common refrain that "this time is different", "we're in a new regime," "it's a different paradigm," and "boomers just don't get his movement" will all prove correct. Maybe. But I've lived through this exact same feeling before, and the catcalls reached deafening levels before they were all silenced. If markets are efficient at one thing, it's making everyone look like fools at some point.
While there have been scattered days in the past month with odd internal metrics that showed some deterioration, overall there is still good support underneath the indexes. That doesn't mean stocks can't fall of their own weight - the internal picture was just as good a year ago before the hardest fall in history - but it does lessen the immediacy of some of the caution signs we see among euphoric sentiment readings.
Active Studies
Time Frame | Bullish | Bearish | Short-Term | 0 | 0 | Medium-Term | 2 | 8 | Long-Term | 16 | 3 |
|
Indicators at Extremes
% Showing Pessimism: 2%
Bullish for Stocks
|
|
Portfolio
Position | Description | Weight % | Added / Reduced | Date | Stocks | RSP | 4.9 | Reduced 4% | 2021-02-09 | Bonds | 10% BND, 8.9% SCHP, 4.8% ANGL | 23.7 | Reduced 4% | 2021-02-09 | Commodities | GCC | 2.3 | Reduced 2.1%
| 2020-09-04 | Precious Metals | GDX | 8.9 | Added 4.8% | 2020-12-01 | Special Situations | 9.6% XLE, 8.2% PSCE | 17.8 | Reduced 1.5% | 2021-02-09 | Cash | | 42.8 | | |
|
Updates (Changes made today are underlined)
With a market that has seen the kinds of broad participation and big breath thrusts like we did in the fall, it's hard to become too negative. Those kinds of conditions have consistently preceded higher returns over the next 6-12 months. It's the interim that's more of an issue. Even conditions like that haven't prevented some shorter-term pullbacks. And when we combine an environment where speculation is rampant and recent days have seen an increase in cracks under the surface of the indexes, it's enough to become more defensive over a short- to medium-term time frame. We still don't have much confirmation from the price action in the indexes, so those who are more conservative would likely wait before increasing cash levels. Not much has changed, but I'm getting increasingly anxious and prefer to hold cash over riskier assets so I increased the cash cushion. RETURN YTD: 6.0% 2020: 8.1%, 2019: 12.6%, 2018: 0.6%, 2017: 3.8%, 2016: 17.1%, 2015: 9.2%, 2014: 14.5%, 2013: 2.2%, 2012: 10.8%, 2011: 16.5%, 2010: 15.3%, 2009: 23.9%, 2008: 16.2%, 2007: 7.8%
|
|
Phase Table
Ranks
Sentiment Around The World
Optimism Index Thumbnails
Sector ETF's - 10-Day Moving Average
|
|
Country ETF's - 10-Day Moving Average
|
|
Bond ETF's - 10-Day Moving Average
|
|
Currency ETF's - 5-Day Moving Average
|
|
Commodity ETF's - 5-Day Moving Average
|
|