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Thursday, February 14, 2013

Which one is the contrarian signal?

Watching Wall Street work is really interesting.  We seem to have opposite theories going on.  The infamous "The Death of the Cult of Equities" and "The Great Rotation".  One says the return on equities will be very low going forward and the other says there will be a big move out of bonds and cash into equities driving stock prices much higher.  I think a few years down the road one of these ideas will clearly be looked at as a contrarian indicator.  However, only one of them could truly be called a contrarian indicator.  Why is that you might ask.  That is because the death of equities piece was nearly universally ridiculed while the great rotation idea is nearly universally accepted.  I think I have made it pretty clear my thoughts on the market making a major top.  I think the "great rotation" is equivalent to the 2000 idea of "we are in a new paradigm".  I am sure most everybody that was involved with the stock market in 2000 remembers that saying.  We know how that idea worked out don't we. 

Here is another sentiment chart.


This chart shows that bullish sentiment is the highest since just before the flash crash in 2010.  That certainly worked out well for the bulls.  This kind of optimism is certainly going to make it hard for stocks to continue up.  In The BRICs and the global economy I noted how the industrial metals and BRIC ETF did not seem to show the strength in the global economy that other stock prices seem to be indicating.  This next chart would seem to back that up.

This chart has the above sentiment overlaid with a global economic surprise index. 


The global economic surprises are happening on the down side.  There is clearly a big disconnect between sentiment and the global economy.  Notice the period in late 2011.  There was extremely bearish sentiment while the surprise index was only marginally negative.  That disparity lead to a huge rally in 2012.  Will the current disparity lead to a sell off?

The U.S. economic data is not good despite how it is being spun.  From Doug Short's look at the retail sales data for this January (Source).

The Advance Retail Sales Report released this morning shows that sales in January came in at 0.1% month-over-month. Today's number is matches the Briefing.com consensus forecast. The current 12-month moving average for retail sales is a monthly 0.4%, and the January number outside of recessions is usually strong. January 2011 and 2012 showed gains of 0.8% and 0.5% respectively. 

That last sentence is very interesting.  Outside of recessions the January number is usually strong.  In
Philly FED data  back in Jan. I wrote.

"This data series goes back to 1968 unlike the Empire survey which is much more recent.  I looked back at all the negative readings in Jan. and it pretty interesting.  The years are 1969, 74, 75, 80, 82, 90, 91, 96, 2001, 08, 09.  If you are familiar with the dates of recessions in the U.S. you will recognize that every one of those years but 1996 was associated with a recession.  Only one time out of eleven was the economy not in a recession or just coming out as in the 1991 case.  In 1996 the Dec. print was 19.5 and the Feb. print was 4.9.  There wasn't any prevailing weakness around the negative Jan. print (-14.7) that year.  That clearly is not the case this time.  We are starting out the year weak and the index was negative most of the latter half of last year.  This is yet another piece of data that looks very recession like."

When it comes to making major tops this is pretty much textbook.  Earnings growth has flattened out and seems to be turning negative.  The global economic data is surprising to the down side.  The U.S. data still indicates we may be in a recession.  Courtesy of Wall Street, we now have a widely accepted theory ("the great rotation") of how stock prices are going to fly up.  That story is clearly an attempt to find bag holders for the coming bear market.  Yep, all the warning signs are there all right.  I guess we will see if it is different this time or not.  Maybe there is a chance that all those people going long on margin are going to get rich.


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