Author: Brad Lamensdorf

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.

Market Sentiment is Still Too Frothy!

Market sentiment is still too frothy.

Not much has changed in the last week.

The spread between the bulls and bears has come in a bit. It’s gone from 43 to 32. This is normal as a small correction has started to make some folks nervous. 

However, this is likely just a start to the cycle of fear. We are nowhere near the levels of pessimism needed to mark a meaningful low.

Market sentiment is still too frothy.

Market sentiment is still too frothy

As our last two Chart’s of the Week discussed, market valuations and price action suggest there’s a lot of risk in the markets right now. 

Can the market rally from here?

Of course. However, when you add sentiment that is too bullish into the mix with the other issues we have recently highlighted, any gains from here will likely be wiped out. 

There’s almost surely going to be a more favorable spot to buy stocks from here.

The Active Alts SentimenTrader Long / Short strategy uses numerous indicators, including sentiment, to identify market extremes and adjust exposure accordingly for superior risk-adjusted returns. To learn more, visit activealts.com 

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Supply > Demand = Lower Stock Prices Ahead

By John Del Vecchio and Brad Lamensdorf

It’s simple really. When supply exceeds demand, prices tend to head lower. Last week, The Chart of the Week highlighted Warren Buffet’s favorite market indicator. Valuations are stretched to say the least. Of course, what’s overvalued can become more overvalued before markets correct.

This week we look at price action. Specifically, the Bullish Percent on the S&P 500. The Bullish Percent Indicator measures the percentage of stocks in bullsih trends using point and figure charting. Point and figure is a century old. The beauty of this method is that its simple to understand. Stocks are either in a bullish or bearish trend. 

Furthermore, unlike the indexes which tend to be market-cap weighted, Bullish Percents use a “one stock, one vote” weighting method. Each stock is viewed the same. This can highlight pockets of strength, weakness, and most importatnly, divergences in the market.

Look at the chart below.

Supply > Demand = Lower Stock Prices Ahead

Supply > Demand = Lower Stock Prices Ahead

There’s been a huge run in the S&P off the lows several months ago. That represented a period where stocks became deeply oversold and market sentiment was simply too negative. 

We were very bullish near the lows.

Not anymore. 

While the indexes surged, a lot of stocks simply ran out of breath recently. They couldn’t keep up. While technically the S&P 500 didn’t get so overbought as to register a sell signal, stocks sure did in the over-the-counter market.

Now prices are reversing. 

More negative trends are starting to emerge.

What does this all mean? Well, risks are higher here. Yes, the market could bounce and rally from here. But the risks are all those gains, and then some, will disappear. 

Markets tend to overshoot. In both directions. 

There will be low risk opportunities to scoop up stocks in the future. Possibly the near future. But we have a way to go from here. Market sentiment is also too bullish to get aggressive buying stock here.

Contrarians will simply sit on their hands for now.

The Active Alts SentimenTrader Long / Short strategy uses numerous indicators to identify market extremes and adjust exposure accordingly for superior risk-adjusted returns. To learn more, visit activealts.com

Market Sentiment  is No Where Close to a Buy Signal

Market Sentiment  is No Where Close to a Buy Signal.  The bulls dropped to 54.8%, from 59.0% last issue. Late Aug saw 61.5% bulls, their highest reading since Sep-2018 at 61.8%. (Mid Jan-20 saw them up to 59.4%.) Our rules says above 55% bulls needs defensive measures – tight stops at the minimum and possibly some selling among shares with big gains. Bulls 60% and above signal increased danger the higher they get, and the need to prepare for a market decline. Sentiment top signals can take months before markets decline. The final Aug bull count was up substantially from just 30.1%, shown near the 23-Mar market lows. That was the fewest since Dec-2018 ended with a similar 29.9% count. Bulls near 30% say cash is high after a market tumble for a lower risk buying chance. The signals for market bottoms occur much more quickly than indications for market tops.

The bears increased to 18.3%, from 16.2% a week ago. That equaled their 2½ year low shown twice in Aug. The new bears moved from the correction outlook, raising more cash and now projecting a resumption of the Mar selloff. Very low bearish readings do not suggest strong rally potential. Lots of bears do! Now we await a further buildup in their reading to signal a bottom. That occurred as stocks tumbled to late Mar lows, with the bears jumping to 41.7%. They also outnumbered the bulls for three straight weeks to signal a buying chance. That situation has been rare since the 2008-9 financial crisis. Similar elevated bearish levels were also shown Dec-18 and Feb-16, when other market selloffs ended. Bears below 20% are not favorable for longs, while high readings, especially when they exceed the bulls, are indicative of market bottoms.

The bull-bear difference narrowed to +36.5%, from +42.8% last issue. That ends five straight +40.0 spreads, which signaled elevated risk and a potential decline. Aug ended with the widest spread since Jan-2018 when it exceeded 50%! In contrast, the Mar-20 lows had a -11.6% negative difference. Then the bears outnumbered the bulls for three weeks. That has been rare since 2009. Negative spreads point to lowered risk for longs the larger they get! Other similar buying chances were -4.7% in Dec-18, -14.5% in Feb-16 and -25.0% in late Oct-08. In contrast, that Jan-20 peak spread was followed by a mid-Feb-20 reading at +35.8%, as indexes hit repeated highs to start this year. Above +30% counts show more risk the higher they get, with defensive measures appropriate above 40%. Prior to +41.5% in Jan this year we saw a +43.2% spread late Sep-18, just before the S&P 500 corrected 19.7% to its Christmas Eve low that year.

Stem Out For Knee Surgery

 

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Buffet’s Favorite Indicator Screams “Sell”!

By John Del Vecchio and Brad Lamensdorf

Buffet’s Favorite Indicator Screams “Sell”! The favorite market indicator of Warren Buffett, the richest investor in the world, has flashed a screaming sell signal. The total market cap of the Wilshire 5000 relative to gross domestic product (GDP), is now at generational highs.

Take a look at the chart below.

Buffet’s Favorite Indicator Screams “Sell”!
Buffet’s Favorite Indicator Screams “Sell”!

The ratio of market value to GDP stands at 144%. That’s over 2.5x where it stood at the depths of the financial crisis in 2008-09! Not only that, it now exceeds the extreme levels of the market back during the Internet Bubble.

We all know how that ended. Trillions of dollars wiped out from investors’ accounts before the market normalized and it was time to buy shares again.

The current levels of market value to GDP are not just high, they are at extremes. 

Market extremes on both ends provide great opportunity for outsized returns with lower risk.

Right now, the risk is to the downside.

Buyer beware!

The Active Alts SentimenTrader Long / Short strategy uses numerous indicators to identify market extremes and adjust exposure accordingly for superior risk-adjusted returns. To learn more, visit www.activealts.com. 

 

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Fed Low-Interest Rate Policy is  Forcing Investors To Take Dangerous Investment Risks in Desperate Search For Better Yield

Fed Low-Interest Rate Policy is  Forcing Investors To Take Dangerous Investment Risks in Desperate Search For Better Yield. The 30-year  chart below shows US corporate bonds moving into negative yields.  That’s the result of the Fed policy to keep interest rates low to stimulate the economy. However, those  negative rates also are causing many individuals and institutional investors, including insurance companies and pension funds, to take enormous risks for higher yields. For instance, to make up for actuarial deficiencies for underfunded pension funds.  The shifting money away from the corporate bond market into areas like the overbought stock market and many real estate classes is pushing up asset values beyond reasons.  And, that raises questions about whether the low-interest rate policy will ultimately do more harm than good when these investments come tumbling down.

Fed Low-Interest Rate Policy is  Forcing Investors To Take Dangerous Investment Risks in Desperate Search For Better Yield
Fed Low-Interest Rate Policy is  Forcing Investors To Take Dangerous Investment Risks in Desperate Search For Better Yield

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