Thursday, November 18, 2021

Morning Note: A Bullish Lean, More Stinky Breadth, and "two warranted prices for a share" of stock...

Along with our own macro and financial stress indices we maintain another barometer that tracks investor sentiment. Long-time clients and readers will recall many "side-of-the-boat" references made herein over the years. I.e., we try to discern when there's a crowding on either the bull or the bear side of the boat, as, when either nears an extreme, there's heightened risk that the boat will begin to take on water, sending the crowd, in a blind panic, sprinting to the other side.

Well, while I wouldn't say that the bull side is dangerously crowded, over the past few weeks our indicator has gone form essentially neutral to a bit of a lean in that direction.

Our scoring of sentiment across the options market, short interest readings across major averages, futures traders positioning, newsletter writers and individual investors nets a current -18.18. -100 would denote maximum greed. 

So, again, nothing to get too excited over, but it does hint to what I'll call growing complacency.

Our newsletter writer sentiment score comes from Investor Intelligence's widely subscribed to weekly survey. Each report features excerpts from the writings of a handful of bulls and bears.

This one from a bullish author captures the feel-good seasonality that tends to shade this time of year green for investors:

"...there is a trend that not always, but more often than not, seems to hold true. For whatever reason, the months of November, December and January tend to perform a little better than any other three-month period. 

Why is this? There are dozens of answers but the most logical to me are that investors are feeling pretty good about the upcoming holidays. They are less apt to look at the market every day (or every minute) as they look forward to travel or seeing extended family, getting their shopping done, and avoiding too-frequent trading. Then, with the advent of the New Year, the good feelings tend to last a little while further since there is more optimism that the next year will have good things in store.

In a good year like 2021, where the market is already drifting up, the fact that there is less intra-day panic (since there are fewer following the market until day's end or the weekend,) the trend tends to stay intact."

I sympathize, although, frankly, while, again, there's complacency in the air, I'm a little surprised the bullish mood isn't even giddier, given the season. However, like I've suggested in recent videos, I suspect the calendar turn may come with heightened anxiety... 

And here's one from a bearish author:

“There is a new champ! Rivian, the electric vehicle company that just came public on Wed, “is now the biggest US company by market value with no revenue.” “(It’s) seriously mind boggling when it hasn’t even earned any discernible revenue yet,” said the chief market analyst at a U.K.-based financial services company to Bloomberg. Mind boggling valuations are exactly what one expects at the end of a mania. The coming crash will be equally as mind boggling but for different reasons."

While I'm not bold enough to call a "coming crash", I indeed share the sentiment when it comes to the speculative fever that tends to accompany major market tops. Which explains much of our current core allocation, and the options hedging.

Asian equities struggled overnight, with 11 of the 16 markets we track closing lower.

Europe's red nearly across the board so far this morning, with 16 of the 19 bourses we follow trading down, as I type.

US major averages are off (save for the Nasdaq 100) as well: Dow down 194 points (0.54%), SP500 down 0.12%, SP 500 Equal Weight down 0.60%, Nasdaq 100 up 0.31%, Nasdaq Comp down 0.16%, Russell 2000 down 0.72%.

Breadth is very stinky, once again: While the S&P 500 Index itself is barely red this morning, literally 417 of its members are down as I type, that speaks hugely to the, I'll say dangerous concentration the cap-weighted index holds in just a handful of names! The Nasdaq Comp (barely down as well) is seeing losers outnumber advancers by 4 to 1.

The VIX sits at 17.86, up 4.32%.

Oil futures are up 0.23%, gold's down 0.44%, silver's down 0.84%, copper futures are down 0.28% and the ag complex is down 0.40%.

The 10-year treasury is up (yield down) and the dollar is down 0.18%.

Led by KRBN (carbon credits), AMD (chip maker), SOXX (chip makers), tech stocks and base metals futures -- but dragged by MP (rare earth miner), Viacom/CBS, oil services stocks, solar stocks and Latin American equities -- our core portfolio is down 0.39% to start the session.


The following statement -- made at the end of a historically bubbly period -- turned out to be prescient (HT John Hussman):
"I can show, really precisely, that there are two warranted prices for a share. The one I prefer is based on such fundamentals as earnings and growth rates, but the bubble is rational in a certain sense. The expectation of growth produces the growth, which confirms the expectation; people will buy it because it went up. But once you are convinced that it is not growing anymore, nobody wants to hold a stock because it is overvalued. Everybody wants to get out and it collapses, beyond the fundamentals."

– Nobel Laureate Franco Modigliani, New York Times, March 30, 2000

Have a great day!

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