Perpectives

First, let's talk sentiment. The latest reading from AAII is showing 2:1 bears vs bulls. In bull market conditions such a reading would signal a signficant bottom but in bear market conditions, it's only good enough to signal a bounce at best.  Last summer we saw AAII sentiment hit 2:1 bears vs bulls or more three times before the correction was over.  Given that conditions now are worse than they were last summer, I'd expect to at least see the same before we see the final bottom.

Here's a mussing from Alan Farley a trader who writes on realmoney.com

Death of Equity Investment

We're entering the 3rd bear market in the last four years (if you view the flash crash as a mini-bear, which I do). This is the nail in the coffin for the quaint idea of buying stocks as investments. The public already knows this, which is why we've seen a mass exodus out of the stock markets in the last 18 months. In fact, I think the only ones that don't know it is the Wall Street crowd because they're so immersed in the con game that they have no conception of reality.

Two generations of demographics support this death of equity investment: I’m in the middle of the baby boomer generation and will turn 60 in three weeks.  Folks like me are looking to reduce risk so we can pay for our old ages. We have no intentions of taking our low return nest eggs and betting on the next Internet or Starbucks, especially in a Taco Bell society that has lost its flair for innovation.

Our kids, aka the next generation, are dead broke because the old folks in power have abandoned them. They know better than we do that Wall Street is a rigged game because they’ve grown up to an evening news environment that’s bombarded with financial crisis after crisis. Maybe that’s why my two grown children want nothing to do with this industry. Meanwhile, the financial elite have sucked the life out of healthy trends in real estate, raw materials, Internet and a dozen other growth sectors with artificially-created bubbles that are now broken beyond repair. They got rich while their customers got lectured about personal responsibility and thrown out of their homes.

This is fine for me because trading isn't investment, which still works, so I can stick around and turn out the lights and lock the doors when it all ends.  But, to tell you the truth, I find the whole thing quite depressing because capitalism is a beautiful thing, when done correctly.

The above reminds me of the famous Death of Equities article in Business Week back in August of 1979 which talks about how people had given up on the stock market after a decade of high inflation and that there was no hope for equities. Of course we all know that in the 20 years that followed we had a massive bull market in equities. 


I saw the following comment made by one of my friends on facebook. 


Another recession on its way.... and all this time I thought we were still in one? This economy is fucked big time.....


When I see posts like the above two it makes me want to hock the house and go long. I've made mention several times here that the bull market was never fully embraced by the public or the investment community. The public still believed we were in a recession, while inflows into equity funds/ETS, although positive in the first few months of the year, were still quite small relative to how much was pulled out. Then you have the retail trading community who complained about the market all the way up. Common things I heard was "low volume" and "rigged by the PPT" and as the market would make new highs instead of excitement I would sense moaning and groaning. All of  this suggested that there was potential for the bull market to climb to new highs because there was a lot of doubters and that it would be quite unlikely for it to end because of that. So now I ask myself will I be wrong about this and if so why? If I'm wrong it will be because of what the permabears have been claiming all along...that the economy was simply a dead man walking and if not for the massive government intervention we would have seen an even bigger disaster after the crash of 2008. Such a once in a century type flood would overwealm any kind of sentiment analysis.  



Back in early April of 2009 I made the following comment


I'm quite open to the possibility (no solid evidence of it yet) that we could see another economic revival like in 2003 to once again extend the end game of the super cycle of debt but if and when that occurs, the next downturn will likely be catastrophic because we can't go to negative interest rates next time to stimulate borrowing and we probably can't see governments increase spending to a multiple of today's already massive levels.


This pretty much sums up the fears of what's going on right now doesn't it? Rates can't be cut anymore while governments have their hands tied due to the embracing of austerity. I'm sorry to say but things do indeed look grim and potentially castostrophic. I'm sure there will be at least 1 major effort by European authorities to combat the crisis and that would likely give the markets a lift but after that I don't know. I mentioned before how China could be white knight to help clean up Europe but I'm seeing more and more stories about how bad local debts are starting to surface in their economy...it seems like they are experiencing a hangover from their stimulus plan in 2008. Meanwhile, the bickering in Washington continues.


Let's look at what's happening right now. Market action is shitty. We have global markets led by the BRICs making fresh 52 week lows. We have economic data that is showing weakness and there are many things in my opinion that need to be resolved 1) a restructuring of PIIGS debt and 2) recapitalizing of European banks. How and when will this be done? What will be the economic fallout as a result? 


I get the sense that there's a lot that go wrong with all of this. Now look, with the VIX at 40+, AAII at 2:1 bears vs bulls  and the 10 year at 1.75% I realize the market is ripe for at least a relief rally...perhaps ever a very strong one on just any kind of favorable progress made in Europe. But at the same, I also get the sense that we could just as well see things unravel more and it gets really ugly. It seems as if it's just a matter of days before we see bank runs and major bankruptices in Europe.  


I'll end by saying what I've been saying for several weeks now.....wait for this shit blow over. There's an unresolved crisis, economic momentum has deteriorated and all the while the markets around the world are at fresh 52 week lows. All of this says that the bears are in control and while it may seem too late to go short, it also seems too early to go long aside from ST trading opportunities. Sentiment is very gloomy but remember markets can go higher or lower a lot more than you think possible and a lot faster too. Respect momentum and right now momentum is to the downside. This line of thinking kept me from getting ran over in 2008. I'm going to continue doing what I've been doing and that's a whole lot of nothing.