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.
Despite the stock market’s high volatility sparked by worries about the domestic and global economies, Wall Street strategists are telling clients to overweight their portfolios in stocks at the highest level in seven years (see chart below from Bloomberg) as opposed to being in strong bond and cash positions. Historically, this is a contrarian indicator that investors should take defensive action. Why? When the analysts are overwhelmingly over weighted in stocks, historically the stock market underperforms.
We use Investor sentiment as contrarian indicators of market direction. While short-term indicators are no longer oversold, suggesting the possibility of short-term bounces, the real story remains with the intermediate-term indicators. They suggest stock market investors should remain cautious, with no stock market bottom in sight, particularly in this period of high volatility and global economic and political uncertainty. We should also note that another bad sign for the stock market is that the weekly trading breadth remains very negative and new stock lows outnumbered new highs for the second week.
As for intermediate investor sentiment, The Investors Intelligence Bulls/Bears poll of stock market newsletter writers’ spread between bullish and bearish sentiment barely changed to +31.2 from +31.4% last time (see chart). A spread above 40% calls for increased defensive measures by investors. However, a spread over 30% still means investors should be defensive. Another contrarian warning sign for investors from this poll is that the group of advisors projecting a correction remained heavily in the minority, barely moving to 33.0% from 32.4%.
The U.S. stock market is priced for an earnings troth and then reaccelerating of growth later this year. But it is our opinion that the growth in the number of inverted sovereign treasury yield curves around the world is painting a much gloomier picture for a longer and deeper economic and stock market downturn. The chart below shows that more than 60% of the various yield curves are inverted, the most since 2007.
We use Investor sentiment as contrarian indicators of market direction. It comes as no surprise that the CNN short-term Fear/Greed Index (see chart) registered extreme during this week’s market turmoil. That. from a contrarian point of view, indicates there’s a possibility of some short-term market bounces. However, intermediate-term gauges are telling investors to remain cautious. There’s certainly no indication that a bottom has been reached despite the big drops.
The Investors Intelligence Bulls/Bears poll of stock market newsletter writers’ spread between bullish and bearish sentiment expanded very modestly to +31.4% from +30.2% last time (see chart). A spread above 40% calls for increased defensive measures by investors. However, a spread over 30% still means investors should be defensive. Another contrarian warning sign for investors from this poll is that the group of advisors projecting a correction contracted to 32.4% from 34% the previous week.
We use investor sentiment as contrarian indicators for guidance on market direction since the average investor tends to buy and sell at the wrong times. Although the indicators show that this week’s tremendous volatility frightened some investors into being more cautious, the move away from more bullish sentiment in the previous week was not enough to signal a bottom has been reached. Instead, the indicators were warning that caution remains the watchword in this highly volatile climate – a climate which tends to confuse investors even more than usual.
For instance, the Investors Intelligence Bulls/Bears poll of stock market newsletter writers’ spread between bullish and bearish sentiment contracted to 30.2% from last week’s 40.1%. A spread above 40% calls for increased defensive measures by investors. However, a spread over 30% still means investors should be defensive. Another warning sign for investors in this poll is that although the percentage of advisors projecting a correction moved to 34.0% from the previous week’s 25.7%, that still indicates very heavily invested positions by the editors and their followers. And that means limited cash to help power markets higher.
Another note of caution comes from a weekly member survey by the National Association of Active Investment Money Managers. It shows that the advisors responding to the survey also had very little cash reserves to help power a correction, with 91.4% of their portfolios invested in stocks (see the chart below). The chart, which also includes the S&P 500, shows that stocks tend to move down around the time these advisors become heavily committed to stocks.