Signs
Sign 1: Stock to Bond Ratio
If bonds lag while stocks advance, fund managers are more likely to sell stock and buy bonds. Notice the May rise in bonds and decline of stocks. Of late the bond market is going wild while stocks are flat or beginning to decline.
Witness a chart of SPY vs TLT to see the relationship. The current 90 day average ratio of SPY (SP500) to TLT (20 yr bond) is 1.58 compared with the norm of 1.50.
This is a huge 3 standard deviations from the norm which is only seen 1% of the time.
Historically, in the three months after such an extreme reading, the performance of the S&P 500 has ranged from a loss of 8.7% to a gain of just 1.7%.
This indicator has called two of the biggest market declines in the past decade: March 2000 and July 1998.
Sign 2: Sideline Money & Mutual Funds
As of the end of August, U.S. equity mutual funds had 4.4% of their assets in cash, according to the Investment Company Institute.
Historically, funds should have a 7% cash position. This means the mutual funds are currently 2.5% short on cash, this is another historic extreme.
When cash levels are low, it means there's less money on the sidelines to drive stocks higher.
It also means that if retail investors get scared and sell their fund shares, fund managers will have to sell stock to generate cash to meet redemptions, driving stock prices even lower.
Since 1950, whenever cash shortfalls hit these lows, the S&P 500 has fallen 69% of the time with an average decline of 4%. The last 2 times this happened: early 2000 and 1981.
Sign 3: COTS Short Positions
The "smart" money is BIG on the short end. Current commitments of traders at the commerical level, a record $30 billion net short position in futures on the SP500, DJIA & NAZ.
This is only the third time in recent history that short positions have been so large. The other two times were early 2001 and November 2004.
Another perspective: As stocks slowly rise, the short positions must cover. This provides an artificial support level which drives the market up further and lessens the severity of corrections.
Interesting Codicil: We are entering the six months from early November to the end of April, a period dubbed "turkey to tax time."
Since 1950, the average return of the SP500 during this phase has been 9%. The average return during the other six months of the year was only 2.71%.
Not withstanding, there is a major disconnect between the markets behaviour and what appears to be written on the wall.
There have been recent declines in housing & automotive, the staples of the economy. Already anemic economic growth is witnessed by GDP & other econometric indicators with perhaps the worst yet to come.
Profit margins and consumer spending are slowing, forward guidance is being lowered. Yet the market has continued to rise to all time highs with volatility near all time lows. This absence of fear during a period of rising risk makes no sense.
The Fed staved off economic disaster in 02 by lowering rates, debauching the dollar and printing up more money. This traded one tech bubble "dot com" for a housing bubble "the ownership society".
Should there be another economic downturn and deflating "asset" bubble, which it appears there may be on the horizon, the Fed can only lower rates.
Speculators can also unwind and drop the price of commodities (oil, etc) to ease the pain. Do you feel lucky? Well do ya?
The question you have to ask yourself is: will lower rates and energy prices provide enough rope from these heights?
Thanks to Michael Brush at MSN Money for noticing the three signs.
If bonds lag while stocks advance, fund managers are more likely to sell stock and buy bonds. Notice the May rise in bonds and decline of stocks. Of late the bond market is going wild while stocks are flat or beginning to decline.
Witness a chart of SPY vs TLT to see the relationship. The current 90 day average ratio of SPY (SP500) to TLT (20 yr bond) is 1.58 compared with the norm of 1.50.
This is a huge 3 standard deviations from the norm which is only seen 1% of the time.
Historically, in the three months after such an extreme reading, the performance of the S&P 500 has ranged from a loss of 8.7% to a gain of just 1.7%.
This indicator has called two of the biggest market declines in the past decade: March 2000 and July 1998.
Sign 2: Sideline Money & Mutual Funds
As of the end of August, U.S. equity mutual funds had 4.4% of their assets in cash, according to the Investment Company Institute.
Historically, funds should have a 7% cash position. This means the mutual funds are currently 2.5% short on cash, this is another historic extreme.
When cash levels are low, it means there's less money on the sidelines to drive stocks higher.
It also means that if retail investors get scared and sell their fund shares, fund managers will have to sell stock to generate cash to meet redemptions, driving stock prices even lower.
Since 1950, whenever cash shortfalls hit these lows, the S&P 500 has fallen 69% of the time with an average decline of 4%. The last 2 times this happened: early 2000 and 1981.
Sign 3: COTS Short Positions
The "smart" money is BIG on the short end. Current commitments of traders at the commerical level, a record $30 billion net short position in futures on the SP500, DJIA & NAZ.
This is only the third time in recent history that short positions have been so large. The other two times were early 2001 and November 2004.
Another perspective: As stocks slowly rise, the short positions must cover. This provides an artificial support level which drives the market up further and lessens the severity of corrections.
Interesting Codicil: We are entering the six months from early November to the end of April, a period dubbed "turkey to tax time."
Since 1950, the average return of the SP500 during this phase has been 9%. The average return during the other six months of the year was only 2.71%.
Not withstanding, there is a major disconnect between the markets behaviour and what appears to be written on the wall.
There have been recent declines in housing & automotive, the staples of the economy. Already anemic economic growth is witnessed by GDP & other econometric indicators with perhaps the worst yet to come.
Profit margins and consumer spending are slowing, forward guidance is being lowered. Yet the market has continued to rise to all time highs with volatility near all time lows. This absence of fear during a period of rising risk makes no sense.
The Fed staved off economic disaster in 02 by lowering rates, debauching the dollar and printing up more money. This traded one tech bubble "dot com" for a housing bubble "the ownership society".
Should there be another economic downturn and deflating "asset" bubble, which it appears there may be on the horizon, the Fed can only lower rates.
Speculators can also unwind and drop the price of commodities (oil, etc) to ease the pain. Do you feel lucky? Well do ya?
The question you have to ask yourself is: will lower rates and energy prices provide enough rope from these heights?
Thanks to Michael Brush at MSN Money for noticing the three signs.
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