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.
Newsletters Give Up. There are a few go-to indicators that casual observers tend to gravitate to when discussing “sentiment.” One of those is the survey of newsletter writers by Investor’s Intelligence.
Despite the tumult in markets in recent weeks, the survey hadn’t shown much give-up, which changed this past week. For the first time in well over a year, the Bull Ratio (Bulls / (Bulls + Bears)) dropped below 50%. This means that more of them expect stocks to decline than rally in the months ahead.
This ends one of the longer streaks of bullishness in the survey’s history.
High Dividend Yields Could Start Attracting Big Investors Back Into the Stock Market. Major stock declines have raised dividend yields to levels investors haven’t seen in years. As as result, we believe, could be a trigger for some major institutions to return to the markets to buy high-yielding stocks that they perceive now have become oversold by the recent Corona-induced rush out of equities. Below is a chart of earnings yield+dividend yield-treasuries starting to show value.
The chart below from SentimenTrader shows that there haven’t been as many S&P 500 stocks with dividends of 5% or more since the 2008 financial crisis.
The chart below we created with Adam Newar of Eden Capital shows the ratio of dividend yield to Treasuries is among the most attractive in 50 years. Something positive that could start to signaling a potential bottom as the result of the recent major declines.
Sentiment Indicator Showing Widening Divergence On Outlook for Stock Market Between “Smart” and “Dumb” Investors. SentimenTrader’s Smart Money/Dumb Money Confidence Spread shows that the recent huge stock market declines are triggering outright panic and increasing pessimism among so-called “dumb money” investors. Meanwhile, the huge declines are making the “smart money” increasingly optimistic about a bottom. The chart below shows the widening spread between the two groups. This is an indicator that we will continue to watch closely.
Major Risk Indicators Showing Historic Level of Investor Outright Panic Over Economy and Stock Market. SentimenTrader has combined a number of risk indicators that measure perceived economic, stock market, monetary liquidity, and perceived credit risk of the global financial banking system. As the chart below shows the coronavirus and its perceived impact has sent the level of panic to a record high going all the way back to at least the recession of 1960. The indicator incorporates the TED Spread, Junk Bond Yield Spreads, a ratio of Volatility to 3-Month Treasury Bill Yields and High-Yield CDS Spreads. All of these spike higher when uncertainty about the economy, corporate outlooks and stock prices are high, and reach extreme high levels only during times of outright panic. For example, the TED spread, which shows perceived risk to the global banking system, is the difference between the three-month T-bill rate and the three-month London Inter Bank Offered Rate (LIBOR). The high yield CDS spread indicates the price investors have to pay to insure against companies defaulting. As perceived default risk rises, so does the spread (cost) of the CDS.
Escalating High Yield CDX Index Spread Shows Things are Getting Really Ugly. In good times the spread between the High Yield CDX Index and Treasuries narrows. That’s because lots of investors are very confident in the state of the economy to buy high yield bonds despite their below-grade ratings. However, as the chart below shows, in times of financial crisis the spread spikes sharply as investors run for the hills, fearing the worst. The fact that the spread is a now lofty 592.91 6% is an indication of how bad things are becoming. You’ll note the present spread is even higher than the periods around the financial crisis around 2012- 2013 and 2015-2016.