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Friday, January 24, 2014

Really bullish sentiment and an overvalued market

No bull market top would be complete without very bullish sentiment.  Check out the latest NAIIM survey.



This survey has been above 90 for nine weeks in a row.  The survey started back in 2006 and in all that time the most I could find was 2 weeks in a row.  No respondent was net short during that time. There is quite a bit of downside fuel here.  Check out this chart of the II survey.

The bull/bear ratio has not been this high since 1987.  That is really, really extreme.  Here is a look at the margin debt as of Nov. adjusted for inflation.



As you can see we are very near the 2007 peak in real terms.  The raw number is about $45 billion higher.  Notice how similar the spike up is to the peaks in 2000 and 2007.  Here is another interesting way to look at the data.


This chart is really an attempt to measure the buying power in actual brokerage accounts.  As you can see we now have the lowest amount of buying power left since the 2000 tech bubble top.  Margin debt is really the best sentiment indicator there is.  It is based on what people are actually doing with their money not what they say.  People are clearly extremely bullish now.

Combined with the very bullish sentiment we have weak market internals.  Lets look at the number of stocks above their 200 SMAs.


This chart shows quite a decline from the May peak.  That pullback really clobbered the number of stocks above their 200.  Even though the market has climbed quite a bit higher this indicator never recovered.  That is why I believe the top formation started in May.  Here is a look at the McClellan summation index.


This indicator also took a dive after the May peak.  It also has not recovered.  This indicator is based on breadth and getting above 1000 is not really all that difficult normally.  However, it has gotten nowhere near that level since the May sell off.

What about market valuation?  I have commented a number of times about the Russell2000 in bubble territory.  Goldman Sachs recently commented that the market might be over valued a bit you can read it here Goldman Sounds The Alarm On Stocks.  Here are a few more articles on the topic if you want to dive in further.
Bubble Valuation Blues: GMO 7-Year Outlook for U.S. Stocks is Negative
Market Cap to GDP: The Buffett Valuation Indicator
Market Valuation Overview: Yet More Expensive
The Q Ratio and Market Valuation: Monthly Update

If you add all this up we have a possible topping chart pattern, very bullish sentiment, weak market internals and an over valued market.  Maybe all this is nothing.  Maybe the market is just going to keep motoring higher.  But what if it doesn't.  Can it hurt to develop a plan to handle another major decline?   Here is what really worries me.  Check out this chart of global growth.


The last two large declines were in 2007-8 and 2011.  At those market tops the global growth indicator was showing a lot of strength.  It is clearly not showing that same kind of strength now and has not for two years.  If the U.S. market goes down the rest of the world will also.  We saw what the debt problem in the U.S. did to the global economy in 2008.  Now there are debt problems in many places around the world besides Europe.  Some of the places I have seen articles on include China, Indonesia, Singapore, Canada, Australia, Brazil, and Turkey to name few.  Combine those together and they really dwarf the 2008 situation.  Another big drop in global stocks could easily send the global economy into recession again and make these debt problems really acute.

Bob


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.