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U.S. Market: What Is Widespread Excessive Optimism Indicating?

August 5th, 2017 · Chris Vermeulen · 9 Comments

I implement these “seasonality” charts as they have been a great framework into all of my trading/investing technical analysis.  Seasonality charts are constructed from the past thirty years of historical data. I implement them as “contrarian indicators”.  The “extreme bullishness” is perceived as bearish and the “extreme bearishness” is perceived as bullish!

In the chart below, it displays the spread between the percentage of bulls and percentage of bears rather than just looking at bulls or bears in ‘isolation’.  Many deeper internals of the BIGGER PICTURE of the overall market sentiment become more relevant!

The sentiment consensus scenario seems to be ‘lulling’ everyone to become “extremely bullish” which is a FLASHING RED WARNING SIGNAL.

chart1

The chart below displays only the total put/call ratio to provide the most comprehensive view of options sentiment. A high put/call ratio indicates “negative sentiment”.

Latest Value(s):

  • Last Reading: 0.33: JULY 28th, 2017

Extreme Values:

  • Excessive Optimism: 0.2
  • Excessive Pessimism: -0.2

cbeo

 

 The Rule:

If the 4-week average of the CBOE total put/call ratio is less than or equal to 0.90 (indicating optimism), you should be out of the market!

Current Reading: 1.08
Data Source: CBOE

Seasonal trends are extremely helpful in identifying typical supply/demand patterns or even new trend changes. These are self-reinforcement patterns that have emerged over time and can be taken advantage of over the years as they have proven to be highly reliable. I use ‘seasonality’ as a secondary concern for any analysis.

“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.” -John Templeton

Is The Party Over?

It is not a coincidence that within the same window of time of the writing of this market report, Howard Marks, a quant strategist at JPMorgan, is issuing an alarm regarding the markets! (http://www.zerohedge.com/news/2017-07-27/we-may-be-very-close-turning-point-selloff-blamed-note-jpms-marko-kolanovic).

I quote him as saying “the upcoming mean-reversion will leave many in ruin, and that while there is still time to get out of the market, we may be very close to the turning point”.

 Colin Cieszynski,

The Chief Market Strategist at CMC MARKETS in CANADA, https://www.cmcmarkets.com/en/news-and-analysis/featured-chart-week-of-july-31-nasdaq-100-showing-signs-of-peaking-following-bearish-key-reversal-and-round-number-failure) noted that Thursday’s (July 27th, 2017), “breakout to a new all-time high by the Nasdaq 100 and subsequent sell-off was a bearish key reversal day that may represent the peak of the recent bull market. Other bearish signs emerging include a negative RSI divergence and a failure at 6,000 a big round number”.

It seems that everyone is distracted by many topics including discussions of inflation, Fed fund rates and the lack of progress of the Trump administrations’ policies and yet no one is addressing the continuing rise of our already massive debt. The money to drive these markets higher has been borrowed. While this can continue for quite some time, it is not a solid fundamental factor of stability.

There is not a strong argument to be long stocks now, other than the fact that the trend remains up, and we have yet to see total euphoria in the market.

Sector rotation is strong and it warning that skilled traders and insiders are moving their money around to only be in the hot spots and avoiding those of weak. This is what happens during late stages of a bull market. In fact, we say this last year and the markets were on the verge of rolling over until Trump became president and that rejuvenated the markets for one last bull market surge before the end.

While analysts like the two quoted above are yelling the sky is falling, It’s not the case just yet but the end is nearing and next year could be the year to be heavily invested in cash and digital currencies.

Currently, the SPX continues to trade around our upside price target. There is little room left on the upside.  When confirmed, a correction of 150 points to 200 points is highly probable on the SPX! I will immediately send out an ALERT, followed by a new market analysis update. With new positions that need to be added, to my subscribers.

Based on rough mathematical projections, it will be approximately no greater than 10%, but a minimum of at least 5%. Traders and Investors will feel like the U.S. equity markets are crashing, but they aren’t. It’s just a much-needed CORRECTION!

My general rule is that a trend is in effect until it proves that it is NOT!

American consumers have reached an almost -record level of optimism over the past 8 months. It is not the most perfect timing mechanism. The only other times that optimism for rising stock prices occurred, over such a long-time, was when it reached those levels in June 1987, December 1997, June 1999, and January 2004, which were all followed my mutli-month corrections.

Conclusion:

In short, active traders should be defensive over the next few days as we could have one more bout of selling in stocks and a spike in the vix Thursday/Friday as we forecasted in our last article. I feel the best plays right now are short metals, short oil, long dollar.

Stay tuned for more updates, and be sure to join our stock picks newsletter, or our ETF trading newsletter for real-time trading signals.


9 responses so far ↓

  • 1 lachlan // Aug 6, 2017 at 11:28 am

    Volatility very very low. That will likely change with a bang one day. Whether it amounts to anything in particular I won’t guess.

    http://www.marketwatch.com/investing/index/vix/charts

    “The money to drive these markets higher has been borrowed. While this can continue for quite some time, it is not a solid fundamental factor of stability.”
    Ten years ago I thought this was highly important. Empirically however we can see that gov debt etc is just one of many factors which may lead to problems and further there is no way to determine just how much debt will be required to cause a certain effect in a market. Tenuous stuff. At some point it must be up to the ability of parties trading this debt to coexist in business that determines a lot. For individuals/families the relationship between debt and crisis is easier to understand.My ten cents anyhow.

  • 2 Greg Atkinson // Aug 7, 2017 at 10:28 am

    Lachlan I have an uneasy feeling that the markets are in a similar place to where they were in 2007 and ominously Macquarie Group is once again edging towards $100 a share. All may look okay on the surface but we need to keep in mind that an enormous amount of liquidity has been pumped into the global financial markets and so the chances of risk being correctly priced is quite low. In the US the markets seem to be rallying on auto and it’s hard to understand based on fundamentals alone what’s driving things upwards. I think Tesla is a good example of this – the company is burning up cash, has never made a profit and yet has a market valuation higher than Ford or General Motors. Strange days.

  • 3 Biker // Aug 7, 2017 at 12:27 pm

    Yes, Tesla is certainly one to watch… . We’ve put off buying a new car, in the expectation / hope that the Model 3 will be here by 2020. We wonder if (m)any other Aussies are doing the same.

    There’s a tipping point* we’re approaching, when it will be questionable whether petrol / diesel vehicles are ‘economic’, let alone consideration of any environmental issues.

    Thinking that the lithium triangle (Chile, Argentina and Bolivia) would dominate lithium production, I confess I discounted Aussie players (to my cost!) Since then, a half-dozen players have emerged… .

    Ah well, my missus gets her new birthday eBike next week. No great rush for the Tesla Model 3… . 🙂

    * Apparently when discussing lithium’s prospects, economists refer to an ‘inflection point’. UBS sees that as 2018. I’d be surprised if it’s that early, but I’ve been surprised before… . 😉

  • 4 lachlan // Aug 10, 2017 at 7:27 pm

    https://www.tesla.com/en_AU/findus?redirect=no#/bounds/-0.6911343999999999,166.74291670000002,-51.66332320000001,100.09110720000001,d?search=store,service,supercharger,destination%20charger

  • 5 Biker // Aug 10, 2017 at 10:36 pm

    Well, that’s a start, Lachlan. We’ve seen charging stations _all over_ the US… and Canada… even in Walmart’s parking lots. America’s best wineries now have free charging stations!

    I’ll admit, we’ve been hooked on Tesla’s vehicles, ever since Goldilocks sat behind the wheel of the X in Portland Square last year… . Those falcon-wing doors sealed the deal! The X had towed an immense bullet-shaped trailer (ie., caravan) into that arena. Pretty awesome.

    Second admission: Since 1984, I’ve had the same admiration for Apple as Tesla. I’ve owned dozens of Apple products since then… and currently own around a dozen, now. Apple is now arguably the most successful company in the world… and I recognise that same visionary zeal Jobs radiated, in Elon Musk.

    I’ll sell (at least) one motorcycle… and one car*… and buy the Model 3. It’s likely both my sons will go one better… and buy the X and / or Y.

    Meanwhile I’ll also build our own quick-charge pad on our property, fed by a large solar array on our guest cottage. We’re both quite excited about an EV future.

    * I’ll keep one SUV for off-road camping / boat-towing, etc. , …and I’ll keep one bike for sentimental / biker club activities. Can’t go _completely_ cold turkey! 🙂

  • 6 lachlan // Aug 11, 2017 at 11:12 am

    The Dow tells me strongly that we need a correction Greg. I’m not sure how big a correction.
    Biker I have a testing time happening right now…fear and opportunity always on the landscape. I will write back as soon as I can.

  • 7 lachlan // Aug 12, 2017 at 9:07 pm

    I like the look of the S. They cost a lot in Australia. My son doesn’t like the Model 3 interior compared to the predecessors however personally I am interested in the performance of the cars vs combustion engine powered vehicles. Linear acceleration, regenerative breaking to feedback power, less need for braking gear, low maintenance etc.
    Oil is an issue in my mind. Coal, no worries. There’s heaps of it everywhere. Coal combustion causes some pollution however it makes EVs run and plants photosynthesize. And it makes me richer too which of course is the main thing.
    Admission 1: in the sense of a heuristic I will just think of Tesla as a Gov Co. Therefore, the gov bond markets may affect the course of its development. However, I am not as sure as many now days that this system which fail to the point that important/worthwhile projects fail too.
    Admission 2: I think the EVs will have a bright future.

  • 8 lachlan // Aug 13, 2017 at 8:09 am

    In any event, you can’t kill a good idea. Nobody truly owns it. Otherwise what I think of Tesla is my subjective viewpoint.

  • 9 Biker // Aug 13, 2017 at 1:42 pm

    Lachlan, I must admit that: 1.) I do prefer the S, myself; 2.) It’s difficult for me to be objective about Teslas; 3.) The Model 3 will be the first in the S3XY range whose cost I can justify.

    The claimed service interval (a million miles) appeals… . The Model 3 may be the last car I buy, especially if autonomous vehicles are available by 2028, as I expect they will be.

    Whenever we’re in Vancouver (or Victoria, BC’s capital) we’re stunned by the proliferation of choices they enjoy. Some of our family members have given up car ownership, in preference for one or more delivery systems on option. Now you might expect that the elderly would be the chief consumers of ride sharing options / community cars, etc., but a lot of these folk are young professional 30-somethings. More EVs and hybrids than I’ve seen in any other part of the world… and taxis are mostly Prius.

    Had to laugh the other night, watching a Netflix movie. The bad guys were driving a shiny black Tesla… !~

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