Brad Lamensdorf, the founder and portfolio manager of Active Alts, is a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF. He previously managed a long-short investment partnership from 1998-2005 under the name Tarpon Capital Management. Earlier in his career Mr. Lamensdorf was an equity trader/market strategist for the Bass Brothers’ trading arm. He managed a short only portfolio in addition to co-managing a $1bil hedging program. He also served as in-house market strategist for the entire internal and external network of Bass Brothers money managers.
Investor Sentiment Rising Optimism Raising Red Flags. We use investor sentiment as contrarian indicators because the average investor usually is wrong about the stock market’s direction. So it is worrisome that Investor optimism was up again this past week. Apparently naïve investors continue to be lured into complacency by record and near-record highs of the major indexes, ignoring, or ignorant, of the underlying market weakness exemplified by the fact that more stocks on the Nasdaq and NYSE once again went down than up.
So despite the markets’ underlying structural difficulties, the Investor Intelligence survey of market newsletter advisors shows bullish optimism increasing to 58.1% from 57.2%. This is the fourth week above 55%, signaling the need for defensive measures including tight stops and selling some shares with large gains. The latest reading exceeds the mid-July peak of 58% before the markets sold off to their August lows. Bearish sentiment was again very low, at 17,1%. For the seventh week the bull-bear spread expanded, ending at +41.0%, from +40.1% a week ago (see chart). This is the second bull-bear spread above 40%. It nearly equals the reading in mid-July before the August selloff. It is another clear call for defensive measures.
Commodities to Equity Ratio Remains at 50 Year Low: For How Long? That ratio of commodities prices compared to stocks has been at an all-time low for the past few years. However, as the chart shows major unexpected events in the past have triggered a reversal of the commodities to equity ratio. EquiCapita points out that the 50-year average for this ratio is around 1.1 times. During the 1970s commodity bull market the ratio peaked at over 3 times. The ratio is currently at a 50-year low of around 0.2 times, almost the same as the low reached around the 2000 tech bust. Will the ratio change soon? No one can say for sure.
On the other hand, the economy is slowing, and the major stock indexes are at an all-time high. We believe much too high. We should point out that while the major indexes have reached new highs, more stocks in the Nasdaq and NYSE have been declining than going up. Our opinion given these circumstances is that record-breaking stocks prices can’t be sustained, and are certainly are vulnerable to unforeseen events. So what else can we say about this ratio? Although it is not a market-timing tool, it is worth watching.
Investor Sentiment and Other Reliable Indicators Suggest Stock Market is Skating on Thin Ice. We use investor sentiment as a contrarian indicator. Although the DJIA, S&P 500 and the Nasdaq Comp hit new highs, sentiment and other reliable indicators are telling us that the stock market is skating on thin ice. For instance, the broad Russell 2000 hasn’t hit a new high since August. Moreover, more Nasdaq and NYSE stocks declined than advanced during the past week. In addition, most of the 45 major market sectors are overbought. This is another sign the market is very risky and could be set for a downturn (see Chart of the Week).
Meanwhile, the Investor Intelligence poll of stock market newsletter advisors reports the spread between bullish and bearish sentiment among the advisors expanded for the sixth week in a row, ending at +40.1%, from +39.7% a week ago (see chart). That equals the reading in late July prior to the big August downturn. Historically readings above +40% call for defensive measures. Bullish sentiment slipped slightly to 57.2%. However, counts above 50% call for caution and this third week above 55% signals the need for defensive measures. As for bearish sentiment, it dropped to 17,1% from 17,9%, yet another contrarian warning indicator.
Sector Sum Indicator is Warning Stock Market is Risky. The sector sum indicator measures the number of bull trends among the 45 industry sectors to determine market risk, and whether the market is about to reverse itself. The chart from Investors Intelligence shows the indicator is close to +30, which means most of the 45 sectors are overbought, and risk is high for a downturn. You’ll note during the past year that a high-risk indicator was followed by rocky times. Conversely, when the indicator was extremely low, -30 and below, the markets moved up. In other words, reversals from high levels are bearish for the market. Upturns from the lows are bullish for the market.
Hindenburg Omen and Titanic Syndrome Could Signal Big Trouble for Stock Market. We’re obviously not talking about the German airship that went down in flames in New Jersey nor the “unsinkable” British passenger liner that hit an iceberg and sank. What we re talking about is sets of conditions in the stock market that historically have been followed by big downturns, if not crashes. Known as the Hindenburg Omen and the Titanic Syndrome, both happened during recent trading sessions on the Nasdaq. As a result, showing great underlying market weakness despite record index highs. You’ll note in the chart below on Nasdaq performance since 1962 to 2019 big drops when the Hindenburg and Titanic kicked in (signified by the red dots).
As Jason Goepfert of Sentiment Trader explains it, basic guidelines of the Hindenburg are that (1) the market must be in an uptrend, (2) a large number of stocks be hitting 52-week highs and 52-week lows, and (3) show negatively diverging breadth momentum. The Titanic adds that the index has to have hit a high in the last seven trading sessions. This followed by more stocks hitting record lows than highs. To simplify this, both are trying to predict dangerous times ahead when an index is doing well. However, there is strife under the surface. Goepfert points out these conditions hit both the Nasdaq and the NYSE in late July. Just before the August downturn, but has not yet occurred on the NYSE. Nevertheless this is a clear warning sign of trouble ahead, particularly when combined with other signs of overall stock market weakness.