Near-Record Proportion of IPOs Losing Money Is Sign of Trouble for Stock Market. As the chart below shows the proportion of Initial Public Offerings going public with losses remains close to a record high (see chart) of around 70% vs. less than 40% in normal times. As as result, that historically is a clear danger sign for the stock market. Over-priced IPOs usually occur toward the end of a long bull run when stocks in general become very overpriced. Just look at the record number of money-losing IPOs at the peak of the 2000 dot.com bubble that turned into a major market crash. Why does this happen? Generally because investors have lost their sense of reality. They are willing to buy stocks on hyped stories instead of the facts. Put another way, investment bankers are willing to stuff the market with over-priced stocks of little value as longer as the public is willing to buy them. There’s an old expression on Wall Street, “When the pigs squeal feed them.”
Biggest Cap Stocks in S&P 500 are Behind its Superior Market Performance: Watch Out! As the chart below shows, more than 18% of the market cap of the S&P 500 is represented by only five stocks. That’s an historic high. And since those stocks, mainly in the technology sector (Microsoft (MSFT), Apple (AAPL), Amazon (AMZN) Facebook (FB)) are up so much higher than the broader markets composed of smaller cap stocks, the S&P 500 gives a distorted and more optimistic view of the performance of the market as a whole. Historically, over-concentration in one sector is dangerous. Another way to look at it is those heavily invested in the S&P 500 (SPX) are betting mostly on the performance of a handful of stocks in one sector. So they may not be as safe as they think they are.
Warren Buffett’s Favorite Indicator, Market Cap to GDP, Signals Stock Market is Way Overbought. Stock guru Warren Buffett is holding more than $128 billion in cash. That’s about 23% of the value of Berkshire Hathaway A class stock, and about 60% of its portfolio of public companies. This huge cash position should be taken as a warning. Buffett believes stocks are way overvalued and that a crash is coming. In fact, the only time Buffett has had a bigger cash position as percentage of his portfolio of public companies is before the 2008 financial crisis, according to Bloomberg. The charts below, from Jill Mislinski of Advisor Perspectives shows how wildly overvalued historically stocks are based on Buffett’s favorite GDP vs. market cap indicator, as well as Wilshire 5000 to GDP. It should be noted that this famous value investor appears to believe so strongly that bad times are ahead. He is sticking to his guns despite underperformance as a result of his growing cash position.
Stock Market Leverage is at Dangerous Levels. As the chart below from Advisor Perspective’s Jill MIslinski shows investor negative credit balances in margin accounts these days dwarf the negative balances that preceded big market declines of the last ten years. Why should we worry about that? Stock drops precipitate margin calls from brokers. These drops often force investors to sell their stock. Today’s enormous amount of margin debt, therefore, could greatly exacerbate a future downturn. Investors are forced to sell to meet margin calls.
We are appreciative to our friends at SentimenTader.com for the following Chart of the Week post:
Stock Market Bulls Trigger a Selling Signal. It’s not hip to be a mutual fund manager anymore – all the cool kids are rushing into ETFs. Even so, the Rydex family of mutual funds still holds more than $4 billion in assets, and it remains popular with fund timers.
It was way ahead of the curve in releasing the asset levels of their funds. Because their client base actively traded, it became a very useful set of indicators, then interesting-but-less-useful as they became more popular and the asset base dwindled. Some of the funds now are beholden to one or a few large traders, which can swing the asset levels wildly from day to day.
Even so, the past few sessions have recorded notable extremes. There is a record low percentage of money stashed in the safety of the money market, the original Rydex Ratio is nearing an all-time high, the Total Bull/Bear Ratio (with funds introduced in February 2000) recently neared an all-time high, and the Leveraged Bull/Bear Ratio (with funds introduced later in 2000) recently hit the 2nd-highest level ever, next to a day in January 2018.
If we look at each of those four indicators relative to their all-time ranges, we’re at a true extreme. For the money market fund, we use an inverse ratio to approximate optimism.
Rydex mutual fund traders have almost never been more bullish.
Looking at the individual ratios, we can see just how extreme they’ve been.
In aggregate, when they peak at an extreme level, stocks have struggled.
S&P 500 after Rydex indicators peak in top 5% of ranges (1994-2019)
Because of the influence of a handful of traders on the data, we pay much less attention to these flows than we did 10 or 15 years ago. Still, they can be useful once in a while when they reach true extremes, and that’s where they’re at now.