Headlines
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Household equity holdings plunge, but remain too high:
In the first quarter, the value of equities plunged relative to other household assets and the size of the economy (GDP). It was among the largest drops on record. Even so, equity holdings remain historically high. Pension funds are woefully underexposed to equities, while their allocation to bonds skyrocketed.
Robinhood traders make big bets on a decline:
Users of the Robinhood platform used Thursday's carnage to make big bets against more declines in stocks. Users holding leveraged short ETFs exploded by more than 13%, a decent sign of a massive shift in sentiment.
Weight of the evidence: The suggestion is flat/lower prices short- to medium-term, and higher prices long-term. Indicators are currently showing excessive optimism, with Dumb Money Confidence was recently near 80% and hasn't declined much despite Thursday's carnage. The Active Studies show that when we look at stocks from various perspectives, there is a heavy positive skew over the medium-term long-term. Recently, there have been troubling signs of reckless speculation, but the breadth thrusts and recoveries have an almost unblemished record at preceding higher prices over a 6-12 month time frame. Indicators and studies for other markets are mixed with no strong conclusion.
The latest Commitments of Traders report was released, covering positions through Tuesday: The 3-Year Min/Max Screen shows that "smart money" hedgers established few new extremes this week. They again reduced their large net long position in major equity index futures but are still long more than $37 billion worth of contracts. Hedgers continued their buying in agriculture contracts, with the most exposure continuing to be in corn, where they're nearing a 23-year high in net contracts held long.
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Smart / Dumb Money Confidence
Smart Money Confidence: 46%
Dumb Money Confidence: 71%
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Risk Levels
Stocks Short-Term
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Stocks Medium-Term
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Bonds
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Crude Oil
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Gold
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Agriculture
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Research
BOTTOM LINE
In the first quarter, the value of equities plunged relative to other household assets and the size of the economy (GDP). It was among the largest drops on record. Even so, equity holdings remain historically high. Pension funds are woefully underexposed to equities, while their allocation to bonds skyrocketed.
FORECAST / TIMEFRAME
None
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The first quarter put a wallop on household finances. According to the latest release from the Federal Reserve, which monitors asset levels through the end of March, equities as a percentage of households' total assets fell from 32.4% to 27.4%.
This is the 2nd-largest drop on record.
When equities as a percentage of total assets fell 3% or more in a single quarter, it was a mixed sign for the S&P 500 going forward. Because it's a quarterly data series and has a 2-month lag, we use longer time frames in the table.
While this triggered at major market lows in 1962, 1970, 1974, 2002, and 2008, it was also very early in 1973 and 2001. Even with those failures, 1-3 year returns were well above average. Because of the variability among returns, and the small sample size, the z-score couldn't make it above 2, however. Also, the best bear market lows occurred when stocks accounted for 20% or less of total assets, and the first quarter of 2020 barely made a dent in that.
As a percentage of GDP, equity holdings plunged even further, from 94.8% to 73.3%.
That's the largest drop on record. Never before had equities dropped more than 20% as a percentage of the economy in only one quarter.
Quarters when equities declined 10% or more as a percentage of GDP mostly overlapped the dates in the first table.
This was too early to be considered a buy signal three times, and was successful four times, so kind of a toss-up. The biggest caveat now is that at 73%, it's still high relative to the most bullish historical extremes. The best returns occurred when equity holdings fell to under 50% of U.S. GDP.
Despite their massive funding troubles, private pension funds appeared to hold or even sell stocks during the quarter. Their allocation to equities dropped to the 2nd-lowest in 20 years, next to the 1st quarter of 2019.
Over a very long time frame, their allocation has been much lower, but not since 1998.
Their allocation to bonds skyrocketed, and at 23% of total assets, is the highest since 1996.
It has been much higher in the distant past, but clearly not anywhere near this in recent decades.
Pension funds have been decent contrary indicators over the past 20 years or so. They seem to make the wrong moves at the wrong times, probably why they have had constant trouble funding their obligations. Based on this alone, it's a modest positive for stocks.
When stocks have declined as much as they did in the first quarter, relative to other assets and economic output, it has tended to precede decent long-term returns. The fact that slow-moving pension funds have such low exposure, with such high obligations, suggests that they should be a steady buyer, another longer-term positive.
The biggest caveat is that household equity holdings are still historically high and major bear market lows occurred when stocks were a much less prominent part of total assets. Because of that, we can't consider this a positive yet, on any time frame.
BOTTOM LINE
Users of the Robinhood platform used Thursday's carnage to make big bets against more declines in stocks. Users holding leveraged short ETFs exploded by more than 13%, a decent sign of a massive shift in sentiment.
FORECAST / TIMEFRAME
None
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At the end of May, we looked at user behavior among Robinhood account holders. The commission-free platform has become enormously popular during the past couple of months, ostensibly as an outlet for bored gamblers.
At the time, they were showing a modest preference for leveraged long ETFs, maybe a slight negative for stocks. If we check how they behaved during Thursday's rout, we can see a clear change in sentiment.
The data hasn't been around long, and Robinhood's popularity among fast-fingered traders has been a "thing" for an even shorter amount of time, but below we can see the one-day user growth in accounts holding the leveraged long ETFs minus the growth in users holding leveraged short ETFs.
There was a 1.2% drop in users holding the long ETFs and 13.1% rise in users holding the short ETFs, for a net difference of more than 14%, among the largest in two years.
Below we can see the S&P 500's shorter-term returns following any day with at least 10% more growth in short bets vs long bets.
It's not a shocker that this happened during the most volatile stretches in recent years. It was an excellent bottoming signal in 2018 and 2019, but triggered very early in March of this year. Even so, the 2-3 month returns were solid.
Maybe Robinhood will stick around and this can develop into a reliable indicator of retail sentiment. More likely, volatility will pick up, users will move on to their regular jobs and sports betting, and interest in the platform will wane. As it stands, it's a decent reflection of rapidly changing sentiment, and at the moment it suggests that Thursday's panic might be enough to be a decent positive sign over the medium-term.
Active Studies
Time Frame | Bullish | Bearish | Short-Term | 0 | 1 | Medium-Term | 8 | 5 | Long-Term | 40 | 1 |
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Indicators at Extremes
Portfolio
Position | Weight % | Added / Reduced | Date | Stocks | 29.8 | Reduced 9.1% | 2020-06-11 | Bonds | 0.0 | Reduced 6.7% | 2020-02-28 | Commodities | 5.2 | Added 2.4%
| 2020-02-28 | Precious Metals | 0.0 | Reduced 3.6% | 2020-02-28 | Special Situations | 0.0 | Reduced 31.9% | 2020-03-17 | Cash | 65.0 | | |
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Updates (Changes made today are underlined)
In the first months of the year, we saw manic trading activity. From big jumps in specific stocks to historic highs in retail trading activity to record highs in household confidence to almost unbelievable confidence among options traders. All of that came amid a market where the average stock couldn't keep up with their indexes. There were signs of waning momentum in stocks underlying the major averages, which started triggering technical warning signs in late January. After stocks bottomed on the 23rd, they enjoyed a historic buying thrust and retraced a larger amount of the decline than "just a bear market rally" tends to. Those thrusts are the most encouraging sign we've seen in years. Through early June, we were still seeing thrusts that have led to recoveries in longer-term breadth metrics. The longer-term prospects for stocks (6-12 months) still look decent given the above. On a short- to medium-term basis, it was getting harder to make that case. Dumb Money Confidence spiked and there were multiple signs of a historic level of speculation. Given that, I reduced my exposure a bit when stocks gapped down and failed to hold the lows of late last week. This is likely the lowest I will go given what I still consider to be compelling positives over a longer time frame. There is not a slam-dunk case to be made for either direction, so it will seem like a mistake whether stocks keep dropping (why didn't I sell more?) or if they turn and head higher (why did I let short-term concerns prevail?). After nearly three decades of trading, I've learned to let go of the idea of perfection.
RETURN YTD: -6.7% 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%
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Phase Table
Ranks
Sentiment Around The World
Optimism Index Thumbnails
Sector ETF's - 10-Day Moving Average
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Country ETF's - 10-Day Moving Average
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Bond ETF's - 10-Day Moving Average
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Currency ETF's - 5-Day Moving Average
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Commodity ETF's - 5-Day Moving Average
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