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.

Sentiment gauges retreat a small amount under trade tension

Short term sentiment pulled back this week a touch. The CNN Fear greed index is neutral at 57.

“Last week the NDR short term sentiment hit 85, and this week it came in at 66. It remains in a sell
signal.

Long term sentiment remains too bullish. The Investors-Intelligence bulls/bears remains negative, at 52 bulls and 17% bears. NDR crowd sentiment is up a touch to 68. Each remains in a negative position.”

Why CPI Numbers Suggest Interest Rates Are Too Low Vs. Inflation

The following chart from Shadow Statistics by John Williams compares the official government Consumer Price Index (CPI) with the significantly higher CPI that Williams calculates if the index was measured by pre-1990 methodology when interest rates generally were higher than inflation.  Williams believes that there’s been a sharp deterioration in the last couple of decades in the methodology the government uses to calculate CPI and it doesn’t reflect what consumers and businesses are really experiencing. In any case, both present government-calculated CPI and Williams’ “shadow” CPI show that the current 3% interest rates result in a nominally negative return. What does this mean? Interest rates are likely to go up 2% to 3% to more realistic levels.

Market Sentiment Gauges Warn: “Be Fearful” 

“Be fearful when others are greedy and greedy when others are fearful.”
– Warren Buffett

Short-term and intermediate-term sentiment gauges are signaling investors have become greedy –  warning signs that that stock prices are too high. The CNN Fear and Greed Index is now in greedy territory at 63.  Meanwhile, the Ned Davis Research (NDR) short-term sentiment gauge is at 85, compared with 18 last February. That also means greed and excessive optimism pervade investor sentiment.

Intermediate-term sentiment this week also moved into the sell territory.  The NDR Crowd Sentiment Poll moved up to 69, signaling excessive investor optimism.  Another contrarian indicator, the Investors Intelligence Sentiment Poll of investment newsletter writers, also move back into the sell area with 56% of writers bullish and 18% bearish.

Beware: Default Rates Could Be Set To Explode

Debt as a percent of nominal GDP has approached a 30-year high (yellow line), while defaults are hovering at all-time lows (green line). Why does that matter to you? Over the last three decades debt accumulation tended to occur several quarters before the default rates began to accelerate.  This setup, illustrated in the chart,  indicates that a large amount of defaults in the debt market are set to occur again. That historically leads to an increase in interest rates which can have a negative impact on the stock market and other risk assets. Sincere thanks go out to Rodd Mann, who shared the chart with us.

Market Sentiment Gauges Flashing Mixed Signals

Short-term measures of investor market sentiment are flashing warning signs. The Ned Davis Research (NDR) gauge has moved up to a sell signal at 78, a very high number for this short-term measure. Meanwhile, at  62, CNN’s Fear/Greed gauge has moved higher into the greed zone, also warning investors to be cautious. from a contrarian point of view.

Long-term sentiment gauges, on the other hand, have become more bullish. The Investor’s intelligence bulls/bears sentiment number has

jumped to 52% bullish, while the bears have dropped to 19%. Meanwhile, the NDR intermediate crowd sentiment number is basically unchanged at 64.  While this is high, it does not enter intermediate sell territory until it reaches 70.

 

“Be fearful when others are greedy and greedy when others are fearful.”

–Warren Buffett 

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