Equity Market Positioning Stretched

As I wrote earlier this morning I woke up feeling very different about markets than when I went to bed last night. Here is a few other things that helped colour my thinking this morning and while they don’t indicate that the only way is up they do suggest that pricing and positioning has become stretched as people have piled into negative trades.

The first think I saw on the Bloomberg terminal this morning was the headline “Black Swan Funds Said to Soar Amid Europe Crisis” and I thought that this can’t be a black swan event if it’s happening and everyone knows about it. That suggested to me that positioning was moving very much to the bearish side to get ready for these supposed impending shock event’s. 

The second thing I saw was actually two things. On Twitter I saw a Tweet from @AlmanacTrader which said

# of bearish advisors climbed to highest level since March 09 & 1st time since last Aug # bears exceeds # bulls

That peaked my interest and the link took me to an explanatory post I found the following,

Once a week Investors Intelligence sends out a report titled “Advisors Sentiment”. This is one of our favorite sentiment indicators and it has proven especially helpful in confirming market tops and bottoms. In the most recent release, the number of bearish advisors has climbed to the highest level since March 2009 and for the first time since last August the number of bears exceeds the number of bulls. 

Bullish Advisors % less Bearish Advisors % with S&P 500 Weekly Bar Chart

In the chart above the correlation between the bull/bear difference is clear. When the difference between the two approached 40 in the past sentiment was excessive bullish (fully invested) and typically occurred near a market top. This past April is a perfect example of a market top.

With the market suffering a precipitous drop from late July into early August and struggling to regain lost ground, sentiment has also drifted steadily into negative territory and is now approaching excessively bearish levels (mostly in cash and cash equivalents) that is often seen near market bottoms. However, the difference between bulls and bears could go even further negative before the market finally reaches a bottom.

I then saw the Prince’s post over at MacroBusiness this morning covering the same topic but in a different way.

The key point however was that the S&P is the bellwether equity market for the globe. It is thus by virtue of this impact the bellwether for risk trades and risk positioning. So I have always worked on the assumption, some may find it flawed, that when the market gets really bearish on the S&P then they are probably pretty bearish on other “risk” or as I prefer “punting” assets.

Now you will note that the AlmanacTrader has said things could get more bearish and indeed they could but we may be entering a period where traders who want to take on risk might find the rewards to their liking.

Which brings me back to the original question I posed ,

Could we have seen a paradigm shift in the Euro Crisis last night

And a second question

What does it mean for markets?

The first question I tried to answer this morning and the second seems to me answerable insofar  saying that this crisis is not over so markets are going to continue to ebb and flow. The global economy is still weak so there is still a real chance of a negative earnings surprise for equities at some point which will take them lower. I believe that this market is a secular bearish/sideways/traders market akin to the 1965-1982 market so there are going to be ups and downs.

So a European political stabilisation, if that’s what we are moving toward as I expect, wont rescue the market and risk assets from its longer term woes but for the moment market positioning might be stretched just enough for a base to be found sometime soon for a rally in risk assets.

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. 

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

 
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