This Has Only Happened Twice In 40 Years

High confidence

Dumb Money Confidence has recovered from its dip below neutral territory in May. Now above 77%, it’s to a level that has preceded weak annualized returns in stocks.

As a signal, the first reading above this level after a dip below 50% has led to mostly weak short- and medium-term returns.

Small struggles

Three of the “big four” stock indexes hit new highs last week. The exception was the Russell 2000, which was still mired more than 9% below its own high.

A divergence this large has only been seen twice in 40 years, both in 1999. Looking at smaller divergences, there was still a tendency to lead to weak returns in most of those indexes going forward.

Bulls return

The Bull Ratio in the AAII survey moved above 50% for the first time in nearly two months, with the S&P hovering near a 52-week high. Of the 6 other times they’ve behaved this way, the S&P declined over the next 2-12 weeks all but once, in 1992. Longer-term, it was a better sign.

The latest Commitments of Traders report was released, covering positions through last Tuesday

The 3-Year Min/Max Screen shows that “smart money” hedgers established new multi-year short exposure in corn and Eurodollar futures. They’re short more than 20% of open interest in corn for the first time since 2013. They’ve gone from extreme optimism in gold last September to one of the largest short positions ever last week.

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The post titled This Has Only Happened Twice In 40 Years was originally published as on on 2019-07-09.

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