This is the question asked by the Macrobusiness blog in Australia. Note that at the same time the bull percentages remain well below lew rockwell bitcoin stock record highs, so that the ratio of bulls to bears does not look as extreme as one might expect. 2013 when the market suffered a small correction.
There’s little doubt that the bullish mood on Wall Street has reached dangerous proportions. But where I part company with some of my fellow contrarians is whether that means that the stock market’s primary trend is about to turn down. My research has shown that sentiment is only a short-term indicator, which means that the sentiment data do not enable us to forecast the market’s intermediate- or longer-term prospects. I focus on this subset because these advisers are particularly sensitive to perceived changes in the market’s direction — and are therefore good barometers of the prevailing mood. The average equity exposure among these advisers currently stands at 93.
As you can see from the accompanying chart, the Nasdaq Composite Index has been close to a short-term top every time over the last two years when the HNNSI previously approached its current level. Mark Hulbert’s HNNSI reaches an extreme level of exuberance. Now, we agree with Mr. Note carefully that this does not mean that such a pullback couldn’t develop into something more major. When the next bear market does eventually begin, of course, it will start with a short-term decline. My point instead is that, if a bear market does begin, it won’t be because of exorbitant levels of bullish sentiment. As noted, we agree in principle with Mr.
Hulbert, but there is one additional point that needs to be considered. Our feeling is that most of the people who argue that a secular bull market has begun were probably not around at the beginning of the last one. The market’s valuation at the lows in 2008 and 2009 was a far cry from the types of valuations we have historically seen at secular bear market lows. That was by the way completely independent of the level of interest rates. Valuations were extremely low both at the end of the ‘deflationary’ secular bear market of 1929 to 1949, when interest rates were at rock bottom levels, as well as at the end of the ‘inflationary’ secular bear of 1966 to 1982, when interest rates were extremely high. However, we want to leave the valuation argument aside here and concentrate on sentiment. Was there a difference to today?
Is it true that sentiment is only a valid indicator of short term performance, or could there be more to it? People no longer believed that there would be a new bull market before it actually started, and once it was well underway, they kept doubting its staying power. Almost no-one was talking about a ‘new secular bull market’ when the market bested its old highs back in 1983-1985. Robert Prechter was one of the few people who were extremely bullish at the time and he was widely thought of as an incurable eccentric. In contrast to today, the economy was actually moving ahead with vigor. There was very strong economic growth in the second half of the first term of the Reagan administration, which continued through Reagan’s second term.
In order to see the difference to the 2000-2013 period, take a look at this long term chart that includes four years of II sentiment data prior to 1982. Note specifically the bear percentage. II sentiment survey, long term. We believe therefore that there is actually some information about the market’s likely long term performance conveyed by sentiment data as well.
Although sentiment polls and other sentiment and positioning data are only available for a comparatively short slice of market history, the idea that new bull markets are greeted by disbelief was known well before such data were compiled. This remains one of the main differences between today’s market and the markets of yesteryear: since the tech mania peak in 2000, we never saw the valuation and sentiment extremes that are typically seen at the end of secular bear market periods. On the contrary, the data over the past few years are more consistent with those recorded near long term bull market peaks. Of course things don’t have to play out in exactly the same manner every time, but one usually ignores market history at one’s peril. We leave you with three more charts by sentimentrader that show current speculative positioning. In fact, 2013 has so far been the year in which traders have positioned themselves for more upside to an extent never before seen in any year in futures market history.
Keep in mind that we are talking about real money positions here, not about what people are saying in polls. Sentimentrader also produces a chart of Rydex money market fund assets, however, it shows them as a percentage of total Rydex assets rather than depicting their dollar value. It continues to be untrue that ‘no-one likes this market’. In fact, we don’t know about any other year in which the market has been loved as much as in 2013. We can see it in this year’s Barron’s ‘big money polls’, we can see it in sentiment surveys and in actual positioning data, including record high margin debt and recent near record inflows into equity mutual funds.
Of course the bears have been quite wrong so far this year. Nevertheless, when sentiment and positioning data consistently produce new extremes month after month, it tells us that the eventual backlash is likely to be quite a doozy. They have become so used to the ‘Bernanke put’ supporting the market, that they can no longer imagine that it may one day not work as advertised anymore. And yet, it is a near certainty that this day will come. In fact, the year is almost over!
Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody’s readership and hope we have managed to add a little value to your life. Obamacare is another tax increase, which is probably the number 1 reason tapering isn’t going to happen. Federal Reserve the macro numbers don’t indicate a downturn. Click here to cancel reply. A noteworthy confluence of patterns in gold and gold stocks is in evidence this year.
As usual, things are not as straightforward and simple as they would ideally be, but there is always an element of uncertainty – one has to accept that as a given. Another recurring pattern consists of the seasonally strong period in gold around the turn of the year, which is bisected by a mid to late December interim low in the gold price. The New Year is nearly here. The slate’s been wiped clean. New hopes, new dreams, and new fantasies, are all within reach.