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Category: Chart of the Week

Buffet is in the Nosebleed Section

By John Del Vecchio and Brad Lamensdorf

He’s back!

This week we again highlight Warren Buffet’s favorite indicator.

Courtesy of Advisor Perspectives, the ratio of the Wilshire 5000 to nominal quarterly GDP continues to break out to new levels.

Check it out:

Buffet is in the Nosebleed Section
Buffet is in the Nosebleed Section

The ratio is not just breaking out to new highs. It’s in nosebleed territory. It’s a generational level of market valuation.

It looks like a runaway train.

Can it sustain itself?

Possibly. However, the markets are clearly distorted these days. The ultimate impact of ultra-low interest rates, for example, may not be known for years to come.

We do know what happened the last two times valuations veered too far from the norms. Back in 2000, the ratio was about 137%. By 2007, the Housing Bubble pushed it to 105%. Not as frothy, but still outside the bounds of what might be considered “normal.”

Both instances ended badly. It was a horror movie with plenty of blood spilled. 

We have been in uncharted territory now for several years. 

While there has been a fundamental change in the valuation of the markets, we know there is one thing that does not change.

Human nature.

We know from market sentiment that too many people are leaning in one direction.

That direction is long.

We know that they are leaning in that direction more and more with leverage. 

We know that increased leverage comes at a time when market valuations sit in rarified air.

What we don’t know is what could cause everything to swing the other way. However, we do not need to predict that. Too many people are too wrong too often for the market just to climb unabated.

Right now, there’s an “air pocket” that exists under stock prices. It’s a matter of when, not if, that air pocket is popped and all of these indicators swing back the other way. From here, gains will likely be reversed.

As we have pointed out several times in this historical rally, there have been numerous times to aggressively buy stocks tactically and with low risk. 

Right now, we are far from making that call again.

Tread lightly.

The Active Alts SentimenTrader Long/Short Strategy uses this indicator.  Learn more about how this indicator can guide your investments in these uncertain times, schedule a call with Brad Lamensdorf who manages this strategy, here.


Bulls Lathered Up to Historical Levels

By John Del Vecchio and Brad Lamensdorf

It’s the running of the bulls…

Retail investors are as bulled up as they have been in a decade. 

Take a look at this chart, courtesy of SentimenTrader.com: 

Bulls Lathered Up to Historical Levels
Bulls Lathered Up to Historical Levels

The black line is the S&P 500. It’s hitting highs.

The blue line is the ratio of levered bulls to bears using Rydex Funds. 

By and large, the folks that buy these funds are wrong. A lot. Not only are they wrong, they are wrong with leverage. That only makes the problem worse when things don’t go their way.

Longs on leverage are breaking out to 10-year highs. Compare that to just a few months ago in the depths of the COVID lows when bearishness was off the charts.

We have come a long way in a short time. 

Can the market push higher from here? Yes. 

A lot higher? Possibly.

The why should I care?

The masses just don’t make the right call at extremes. 

Markets change.

The stocks that drive the market change.

Human nature never changes. 

These investors will be caught flat footed. Then they will tend to dump their long positions at the same time. The chart will the swing the other way. Eventually, that will create a big opportunity to snap up stocks at deeply oversold levels.

We are nowhere near that level yet though.

The odds favor a butt kicking.

A butt kicking so big that gains from here will likely be lost. And, then some!

What can you do about it?

Give Brad a call. His “Master Key Indicator” is pointing to something big happening. This key unlocks the mysteries of the market and was created using Brad’s 30 years of experience working with billion-dollar managers and the research insights of SentimenTrader.com. SentimenTrader is a leading research firm with clients in 50 countries.

Only 11 spots are available. And, you will need to schedule your call within the next week to take advantage of this opportunity to speak with Brad about how the Master Key Indicator can position your portfolio to take advantage of this big opportunity that should reveal itself within the next two months.

Schedule your call here:

Major Market Excesses as We Head into the Holidays

By John Del Vecchio and Brad Lamensdorf

This week’s Chart of the Week is quite clever. 

It’s not something you will see in the mainstream financial media. It’s a beautiful representation  of extreme optimism or pessimism.

It’s courtesy of SentimenTrader.com.

It measures all of SentimenTrader’s indicators and analyzes whether the indicator is too optimistic or too pessimistic. Sentiment indicators. Technical indicators.

It’s the indicator of indicators.

Today it is flashing major warning signs.

Let’s take a look.

Major Market Excesses as We Head into the Holidays
Major Market Excesses as We Head into the Holidays

As the market has marched higher (black line on the top), the level of indicators reaching extreme optimism has exploded higher (red line). Meanwhile, pessimism has dropped like a rock (blue line).

Compare this to the lows in March and April when the situation was reversed. 

Risk is higher here. There’s too much leaning too far in one direction. It won’t take much to swing things the other way.

Buyer beware.

Speaking of SentimenTrader, the have teamed up with Active Alts to launch a long / short strategy the uses numerous indicators to better manage risk. Right now, the Exposure Gauge is signaling for a big things to come. Why not give Brad a call to discuss how this gauge can help better manage your investments?

Schedule a call here.

“Dumb” Money in Control

By John Del Vecchio and Brad Lamensdorf

Last week, we highlighted the TIR indicator as being very oversold and stretched to the downside. We suggested the odds favored a bounce.

Boy did we get one.

Stocks exploded higher. Especially low-quality stocks with a bit of “hair” on them. It was a tough week for short positions.

Even though these indicators have swung around a lot in recent months, major headwinds still exist for stock prices.

One headwind is that “dumb” money is in control.

Take a look…

“Dumb” Money in Control
“Dumb” Money in Control

The chart, compliments of SentimenTrader, shows the spread between Smart and Dumb money. It should be ovbvious…we want to follow the smart money. Those investors are in hiding. Smart money investors were very bullish at the lows in March and April. Since then they have retreated.

Now the dumb money is bullish.

What’s more is that dumb money is becoming more and more bullish. The trend is working toward the pre-pandemic levels.

Right before a major ass kicking.

The short-term bounce we expected has occurred. Intermediate-term though, there is a risk all of those gains and then some will be lost. 

Making big bets here on higher stock prices is placing a wager on the dumb money.

Did you know that Active Alts has teamed up with SentimenTrader to launch a long / short strategy? To learn more about how these indicators can guide your investments in these uncertain times, schedule a call with Brad here.

Snapback Rally About to Hit a Wall

By John Del Vecchio and Brad Lamensdorf

Well, that was fast.

Last week, we highlighted the Investors Intelligence TIR Indicator. This measure of dozens of technical factors was pressed down to a level of three out of 100. The market was seriously oversold.

We expected a big bounce.

That bounce came and it came quickly. It was ferocious. 

Just as quickly as the market was extremely oversold, it has come back up and around and is now very overbought.

Take a look at the TIR here. It hit 81 on November 9, 2020.

Snapback Rally About to Hit a Wall
Snapback Rally About to Hit a Wall

Markets are a lot like physics. When energy is stored up, the reaction can be significant. That’s what we see when prices get very depressed. Like a rubber band pulled far in one direction, energy is stored up. When that energy is released the snapback is fast and hard.

Now that a big move has happened, there’s not as much energy stored up. This is highlighted in the chart below.

The percent of stocks in the S&P 500 that are above the 200-day moving average just hit 80. That’s the first time in 6 months that stocks have been this stretched to the upside. 

That percentage is threatening to break a several-year high. 

However, there is less energy stored up at these levels. 

Snapback Rally About to Hit a Wall
Snapback Rally About to Hit a Wall

This comes at a time when market sentiment is getting more and more greedy. The bulls just hit 60%. The bears stand at 19%. The spread of 41% is a danger zone.

Importantly, this survey was done before the Pfizer vaccine news. The spread could be even higher next week. 

Yet, risk has increased dramatically from just a few days ago. 

It’s time to pare back risk. Quickly.

How should you prepare for the future?

Why don’t you give Brad a call?  Brad’s Active Alts SentimenTrader Long/Short Strategy combines several decades of experience and research and actively positions the portfolio to take maximum advantage of market extremes. In both directions.

Book a call here.



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