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Daily Report : The Nasdaq's run, and potential end; Risk is wrong as dumb money is right

Jason Goepfert
2020-09-03
The Nasdaq Composite has managed to put together a rare run of momentum over the past 1, 3, and 6 months. Its triple-time-frame gains have only two precedents. When both of those finally fell to a new 10-day low, the momentum bubble had been pricked.; Over the past 2 months, our Risk Level has been high, and stocks have soared despite it. That has pushed the Brier Score to a near-record level. At the same time, highly confident "dumb" money has been exactly right. Historically, they don't get to be so right for much longer.
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The Nasdaq's run, and potential end: The Nasdaq Composite has managed to put together a rare run of momentum over the past 1, 3, and 6 months. Its triple-time-frame gains have only two precedents. When both of those finally fell to a new 10-day low, the momentum bubble had been pricked.

Risk is wrong as dumb money is right: Over the past 2 months, our Risk Level has been high, and stocks have soared despite it. That has pushed the Brier Score to a near-record level. At the same time, highly confident "dumb" money has been exactly right. Historically, they don't get to be so right for much longer.

Warning sign: For the first time in months, there were more stocks falling to 52-week lows than rising to 52-week highs on the Nasdaq on Thursday. Because this comes so soon after the Nasdaq was at a new high, it triggered a Titanic Syndrome warning. A single signal isn't much of a worry - the Backtest Engine shows an average return of -0.5% for the Composite in the month following the 276 signals since 1986. It's more worrying when there is a cluster of signals across exchanges like there was in February.

Bottom Line:

  • Weight of the evidence has been suggesting flat/lower stock prices short- to medium-term, so we'll have to see how Thursday's carnage sorts out; still suggesting higher prices long-term
  • Indicators were showing high optimism, with Dumb Money Confidence above 80% and evidence of skyrocketing speculation while the market environment is turning more neutral - typically a bad combination, though so far the risky conditions have failed to lead to any weakness
  • Active Studies show a heavy positive skew over the medium- to long-term; breadth thrusts, recoveries, and trend changes have an almost unblemished record at preceding higher prices over a 6-12 month time frame
  • Signs of extremely skewed preference for tech stocks neared exhaustion by late June, especially relative to industrials and financials (here and here)
  • Indicators and studies for other markets are showing less consistent forward results, though it's not a great sign for Treasuries that hedgers are net short and optimism on metals recently became extreme with concerning 100-day analogs, with "perfect" breadth among miners recently dipping a bit.

Smart / Dumb Money Confidence

Smart Money Confidence: 33% Dumb Money Confidence: 79%

Risk Levels

Stocks Short-Term

Stocks Medium-Term

Bonds

Crude Oil

Gold

Agriculture

Active Studies

Click here to view the Active Research the site.
Time FrameBullishBearish
Short-Term01
Medium-Term110
Long-Term472

Indicators at Extremes

Click here to view on the site (% Extremes and "Excess" tabs on the dashboard).
% Showing Pessimism: 13%
Bullish for Stocks

VIX
Inverse ETF Volume
Mutual Fund Flow (no ETFs)
Major Index Combo
% Showing Optimism: 37%
Bearish for Stocks

AIM (Advisor and Investor Model)
Smart Money / Dumb Money Confidence Spread
Intermediate Term Optimism Index (Optix)
Smart Money Confidence
Dumb Money Confidence
% Showing Excess Optimism
NYSE High/Low Ratio
S&P 500 Down Pressure
SPY Liquidity Premium
Rydex Ratio
Rydex Beta Chase Index
Rydex Money Market %
S&P 500 Price Oscillator
OEX Determination Index
Equity Put/Call Ratio De-Trended
VIX Term Structure
Stock/Bond Ratio
NYSE Up Volume Ratio
Equity Put/Call Ratio
OEX Open Interest Ratio
SKEW Index
Options Speculation Index
ROBO Put/Call Ratio
LOBO Put/Call Ratio
NAAIM Exposure Index
Retail Money Market Ratio
NYSE Available Cash
Equity / Money Market Asset Ratio
Mutual Fund Cash Level

Portfolio

PositionWeight %Added / ReducedDate
Stocks15.3Reduced 4.2%2020-09-03
Bonds0.0Reduced 6.7%2020-02-28
Commodities5.5-- Select a Direction -- %
2020-08-31
Precious Metals0.0Reduced 3.6%2020-02-28
Special Situations5.1Added 5.1%2020-09-03
Cash74.1
Updates (Changes made today are underlined)

After stocks bottomed on March 23rd, they enjoyed a historic buying thrust and retraced a larger amount of the decline than "just a bear market rally" tends to. Through June, there were signs of breadth thrusts, recoveries, and trend changes that have an almost unblemished record at preceding higher prices over a 6-12 month time frame.

On a shorter-term basis, our indicators have been showing high optimism, with Dumb Money Confidence recently above 80%, along with signs of reckless speculation during what appears to be an unhealthy market environment, historically a bad combination. While there are certainly some outlier indicators that are showing apathy or even outright pessimism, a weight-of-the-evidence approach suggests high risk over a multi-week to multi-month time frame.

That has been the case since July, even arguably June and yet the major indexes hit continual new highs through late August. With the indicators and studies failing to precede any weakness, I've been hesitant to lower my already-low exposure. I am getting increasingly anxious about the oddities we're seeing, though, and lowered it again. This account is mostly about comfort with risk for me, and right now I'm not at all comfortable with any of it. In more than 25 years of experience, this is the oddest market I've ever seen.

I lowered exposure again - likely the lowest I'm willing to go at this point given longer-term positives - and decided to switch to an equal-weight version of the S&P 500 index. I've become intensely uncomfortable with the concentration in the cap-weighted index. Our studies have been mixed with regard to the potential for the equal-weight version to outperform the cap version going forward, so historical support isn't overwhelming. I'm also increasingly interested again in energy stocks, starting with a small allocation. I got burned in March with the unprecedented geopolitical spat that hammered those stocks then but the setup is decent.


RETURN YTD:  -0.4%

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

Click here to view the Phase Table on the site.

Ranks

Click here to view on the site (Ranks tab on the Dashboard).

Sentiment Around The World

Click here to view on the site.

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

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