Monday, April 1, 2024

Euphoria Has Set In, And Your Weekly Results Update

I mentioned in a recent video commentary that we are probably spending more time of late assessing narratives that don't jibe with our present view of general conditions, versus those that do -- as open-mindedness and objectivity are absolute musts for us... Well, I'm definitely not doing that in this post when it comes to the present risk/reward setup for US stocks.

Those of you who've been taking in our latest messaging will find the following very familiar... I.e., Peter Boockvar shares our present concerns:

"I'm going to start with stock market sentiment, which I usually do on Thursday's after I see both the Investors Intelligence and AAII surveys, because the weekly Citi Panic/Euphoria index I see via Barron's on Saturday's has entered Euphoria and at .40 is the highest since mid January 2022 (and which spent almost the entire year in the Euphoria category in 2021 so tough to time). The importance of this survey according to Citi itself is while it is a "gauge of investor sentiment" like others, "It identifies 'Panic' and 'Euphoria' levels which are statistically driven buy and sell signals for the broader market. Historically, a reading below panic supports a better than 95% likelihood that stock prices will be higher one year later, while euphoria levels generate a better than 80% probability of stock prices being lower one year later." 

So, as markets are higher most of the time and Citi has statistical metrics that say there is "a better than 80% probability of stock prices being lower one year later" when Euphoria has been realized, we should all take note. As stated though, it was very euphoric all throughout 2021 and markets kept elevating (though the most speculative stuff peaked in February 2021) so no one can be sure of the timing of when this matters but for those of us managing other people's money and in the risk management business, we should take heed. Especially when we combine this with the more than 40 point spread in II between Bulls and Bears which rarely occurs.

Also, I keep hearing people arguing in both directions that we're seeing year 2000 bubble 2.0 and some saying not even close. At least as measured by the S&P 500 price to sales ratio, it's currently much worse now and more bubblicious though not that it means anything in the short term. It's important to point out that the bubble in the late 1990's that peaked in March 2000 was very narrowly focused as outside of tech, and some other stocks like GE and PG for example, the rest of the market was dirt cheap. Now, valuation elevation is more broad based as measured by that price to sales ratio I mentioned. I like to use this because it smooths out unsustainable profit margins that some companies sometimes have, like Nvidia which mathematically won't sustain a 77% profit margin for more than a year or two, thus I prefer a P/S ratio, not that I'm picking on Nvidia, just trying to make a point. 

As seen, the price to sales ratio is approaching the peak seen in December 2021 which was quite a year of speculation in just about everything with the meme and SPAC stock craze as we all remember with zero rates and epic QE. 

I bring up the extreme sentiment and this valuation metric to make NO call on the market right now but to raise antennas that we should all have a swivel head and eyes wide open when it comes to investing right now in terms of timing new investments, more so than usual and make decisions accordingly with a time horizon and risk profile that best fits your situation because there is little room for error right now. Can this persist? Of course. Will we have a notable shaking of the tree at some point in coming quarters, I believe most likely based on my points.  

S&P Price to Sales Ratio


And here's your weekly sector, region and asset class results update:

"You have to seek truth, even when it's uncomfortable." --Jeff Bezos

Have a great day!

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