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.
SentimenTrader’s Smart Money Confidence and Dumb Money Confidence indices allow investors to follow what “good” market timers are doing with their money compared with what “bad” market timers are doing. What’s happening now? The chart below shows that the smart money is becoming less confident, while the dumb money is becoming more confident. That’s a clear warning sign that investors should take defensive action. It is important to note that dumb-money confidence was very low and smart-money confidence in the market was very high just before the December bounce. That change in confidence in such a short period of time also illustrates how volatile and dangerous the markets have become.
Meanwhile, the CNN Fear/Greed short-term sentiment indicator climbed to 67 even further into greedy territory from 62 the week before, and from 13 a month ago. That’s a negative from a contrarian point of view. Intermediate term indicators have also become more negative. For instance, the Investors intelligence Bulls/Bears poll of market writer sentiment came in at 21% bears and almost 50% bulls. That’s a positive spread of 29, compared to December when the spread was a negative 5 just as the market bounced and the bears outnumbered bulls.
The proprietary Investor Intelligence Sector Sum Indicator measures how overbought or oversold the equity markets are by analyzing the number of bull trends among the 45 major industry groups. The indicator ranges from +40, overbought, to -40, oversold. As you can see from the chart below, the indicator in a relatively short period of time has climbed to the present overbought +30 from an extremely oversold -40 at year end around the time the market rallied. That quick move from oversold to overbought is a clear warning for investors to lighten their portfolios. It also is another indication of how volatile the markets have become.
The past week’s investor market sentiment indicators are showing investors are becoming ever more optimistic about market direction. So from a contrarian point of view because the average investor is historically wrong about where the market is headed, we once again suggest you lighten your portfolio.
The short-term CNN Fear/Greed Index moved up to 62, climbing higher into greedy territory from the previous week. The Investor Intelligence Short-term Composite Indicator –-highly regarded by sophisticated market timers — moved higher into overbought territory to 82 from below 80 the week before. A reading over 70 means the general index has become overbought.
Although margin debt has declined a bit, this chart from Sentiment Trader indicates that it is still close to all-time highs. That’s despite many warning signs that the stock market is overbought. Why is this worrisome? Very high margin often precedes major market declines. It also means a lot of stock is in the hands of weak handed investors who are taking outsized risks that would subject them to market calls and outsized losses when the markets decline. In fact, high margin accelerates market declines. That’s because leveraged investors are forced to sell stock into down markets to meet margin calls. Note that margin spiked in March 2000 at the time of the dot.com crash. It also spiked before the financial crisis in 2007.
Investor market sentiment turned even more optimistic and greedy last week. So from a contrarian point of view because investors are historically wrong about where the market is headed, we once again suggest you lighten your portfolio.
The Ned Davis short-term indicator, which was in mid-40 neutral territory a week ago, this week moved up to an optimistic and worrisome 60. Why worrisome? That’s because 70 means extreme optimism, and is a resounding sell signal. Meanwhile, the CNN Fear/Greed Index moved up to higher into greedy territory at 61 from 59 the previous week and a neutral 43 the week before.
Intermediate term indicators have also deteriorated. The NDR crowd sentiment moved up to 59. Still in neutral territory but trending more optimistic. The Investors Intelligence poll of market newsletter writers was 47% bullish and 20% bearish. The spread is over 25%. A spread of 40% is extremely bearish and a definite sell signal. What’s also worrisome about this poll is that despite the markets’ volatility bearish sentiment remains unusually complacent in the low 20s.