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.
Short-term sentiment indicators were of little use earlier this week in signaling market direction, while intermediate-term indicators were signaling the markets were headed lower.
On the short-term side, the CNN Fear/Greed moved to 18, meaning investors were somewhat fearful, which is bullish from a contrarian point of view. However the Ned Davis Research short-term gauge was at 45, which is neutral.
The real action earlier in the week occurred on the intermediate side. Investor sentiment turned more bullish hoping for a market correction based on some positive news on a China trade deal (news that was called into question later in the week). Optimistic investor sentiment is historically a signal the markets are headed lower from a contrarian point of view since investors are usually wrong about market direction. The Investors Intelligence Bulls/Bears poll of market newsletter writers came in at 48% bullish, a 10-point jump, while the bears came in at 21%. Newsletter writers indicating a correction was coming also jumped up a lot (see the purple line in the chart below), another negative from a contrarian point of view. Meanwhile the NDR crowd sentiment indicator bounced to 59 from 51 the previous week.
The market action on Tuesday and again this morning on Thursday has been very unsettling in terms of market direction. Bank stock dropped precipitous, breaching support levels and playing a major role in the market drop. I continue to draw a line in the sand at 2600 on the S&P 500. If violated the market is likely ready for another leg down.
By the looks of it, it’s going to be a great holiday season!
Consumer confidence is through the roof, and retail sales are surging. As a result, I expect to see lots of presents under my tree this Christmas. No coal for me; I’ve been a good boy.
All this consumer excitement should be great for retail stocks, right? Well, not so fast…
Before we dive into my concerns about retail stocks, let’s have a look at where we are.
Here’s a chart of the history of consumer confidence, from the Global Financial Crisis/Great Recession right up to Tuesday…
Yes, financial crises do happen! The last one was about 10 years ago. We investors often have short memories. Back then, consumer confidence plummeted right to the lows of the stock market in early 2009.
That’s proved to be the buying opportunity of a lifetime! I mean, how much worse could things get? People were leaving the keys to their houses in the mailboxes out front and ditching their cars on the sides of roads.
Today, confidence has surged. It’s more than quadrupled.
And that confidence is giving a big boost to retail sales…
As you can see, retail sales bottomed along with consumer confidence and the stock market. Since then, same-store sales have bounced around a lot.
But, recently, they’ve surged to new highs.
Now, everything is great. Sales are booming. Here’s my question: How much better can it get?
The stock market’s starting to wonder the same thing. While everything is rosy for consumers, consumer stocks are starting to discount all of the enthusiasm.
That’s what my look at the SPDR S&P Retail ETF (NYSE: XRT) revealed to me: lots of red flags.
First, the index is trading below where it was more than three years ago.
Second, it’s trading below key moving averages. It’s in a bear market.
Third, as the index was moving higher, it was doing it on lower volume. Less and less demand was pushing the index higher.
Finally, there’s a massive divergence in the relative strength of retail stocks and the index itself. This means that even though the index had been going up, it was losing momentum compared to the rest of the market.
In other words, super-enthusiastic consumers and strong sales don’t translate into higher stock prices. In fact, the index is suggesting that these stocks have a lot lower to go.
So, about all this news of a great economy and a blockbuster holiday shopping season…
It’s already priced in. And stocks are beginning to reflect the reality that things can’t get much better from here.
The CNN Fear/Greed Index bounced from 8 a week ago to 20 this week, remaining in bullish territory in terms of indicating short-term market direction. Ned Davis Research (NDR) short-term sentiment at 44 is in neutral territory.
Intermediate-term sentiment indicators have moved into more positive territory, but remain somewhat mixed in terms of market direction, The Investors Intelligence Bulls/Bears poll of market newsletter writers came in at 38% bulls and 21% bears, which is neutral to bullish. From a contrarian point of view bulls at under 40% is positive. However bearish sentiment needs to move much higher from the low 20s for a truly positive signal.
Meanwhile it is noteworthy that the NDR intermediate crowd sentiment indicator at 52 is at its lowest point in two years. While this indicator would be very bullish if it moved down to the low 40s, its downward direction does show investors are growing increasingly concerned about the markets. And that is a bullish signal from a contrarian point of view as we approach year end, which traditionally has been a favorable period for the markets.
It’s Déjà vu all over again!
Levered loans are back! Ever since the global financial meltdown, levered loans have been on the rise. Loan issuance is now near the highs of the last peak.
Before the market imploded.
This is a serious warning sign not to be ignored. Why? Because leveraged loans are a type of loan extended to companies or individuals that already have considerable debt. Or, these borrowers have a poor credit history.
Leveraged loans carry a higher risk to the investor. As an indicator, this chart also should help visualize that we are in a very heated environment and that has allowed debt to pile up. The tipping point is unknown. But, the other side will be particularly ugly.
In a word…default. Lots of them.
Recent data released also showed that 80% of borrowers who refinanced in the third quarter chose the cash out option and was the highest since the start of 2007.
So, more and more people are pulling cash out of their house to fund their lifestyle. In a normalized environment, economic activity wouldn’t benefit from this artificial demand created by increased cash outs.
When this comes to an end, and it will, we will see a slow-down. Defaults will also rise because people are way out over their skis.
We saw this movie before 10 or 12 years ago. It’s a horror movie. It doesn’t end well.
The short-term CNN Fear &Greed Index is at an oversold 10, which is signaling a market bounce, from a contrarian point of view. The Ned Davis Research short-term sentiment indicator has pulled back to 33, which is also on the oversold side.
The Intermediate-term sentiment indicators are not quite as easy to read in terms of market direction, but are getting more optimistic. The NDR Crowd Sentiment has fallen to 59, but it needs to get below 50 for a more bullish signal. The Investors Intelligence Bulls and Bears, a polling of sentiment of market newsletters, is at 42% bulls and 21% bears. Bearish sentiment needs to move up at least 10% before there is a clear bullish market signal.