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Thursday, August 19, 2021

Worrisome signs for the longest running bull market in history 8/19

There has not been much to write about for a long time.  The market went relentlessly higher.  However, the internals have been weak for months.

I have recently run across a few charts that are bad signs for this bull market.  This first one is about options.

The Blue line represents retail traders, the red line is the professionals.  For about the last 18 months the volume of retail traders has been higher than for the pros.  This has not happened since 2000.  We all know what happened after that.  This next chart really tells the story.

Households in this country have a record percent of total assets in stocks at 36.5%.  This is 4 percentage points higher than in 2000.  We have been conditioned since 2009 to only expect short duration sell offs.  However, at some point there will be a true bear market.  When that prolonged bear market hits it is going to hurt a lot of people.  

There is a well known statement that retail investors buy the least at the bottom and the most at the top.  I think the retail crowd was very busy in the first half of this year.  This next chart shows the ten largest first half global equity inflows.

The first half of this year saw inflows about 2.6x larger than the previous record set in 2017.  Setting a new record is one thing, but this year smashed (that might not even be a strong enough word) it.

The above data show us the retail crowd has plowed their money into stocks just as they did in 1999.  There is nobody left to buy.  There is nothing but incremental dollars going into stocks now.   The current margin debt is about 50% higher than it was in Jan. 2020.  That crash was bad enough.  Just imagine what could happen with so much more margin debt.  One last chart to look at is the bull pressure chart.

All three time frames are bearish, but what I really want you to notice is the long term lines in the bottom panel.  I noticed the red line was unusually high at the high a few days ago.  I took a look at the 20 years of data I have and was shocked.  Every other time the long term red line got this high SPX was either below the 200 DMA (most of the cases) or very near (only a couple of times).  It is unprecedented to be this high while SPX is this close to its all time high.  The charts above showed retail investors are buying like crazy.  The bull pressure chart says the institutions are selling to them as fast as they can.  The pros call them bag holders.  Somebody has to hold the stocks when they crash.  Do not be one of them.

Obviously, we will only know if the final high is in with hindsight.  However, it would seem possible it happened the other day.  In the short term a trip by SPX to the 200 DMA seems pretty certain unless it is different this time than the last 20 years.  This looks like a very good time to raise some cash and have a plan in case the selling gets out of hand.  I think a true, long lasting, bear market is very close at hand.

Have a great evening.


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