A Leading Market Indicator Worth Considering
We have written a series of posts expressing reservations about the current level of investor euphoria. The chart attests to how pervasive investor optimism has become.
Investment opinion has become polarized, with only a small minority expressing concern about the potential consequences of the current extreme of market sentiment and valuation. The suggestion by the chart that a rapid decline in neutral opinion is a leading indicator of S&P 500 weakness supports our view that the current risk/reward for markets is poor.
Our recently published May issue discusses our strategy for protecting the profitability…
There are few topics in the world of investment that will generate more spirited debate than the respective merits of the growth or value school of investing. Both schools of thought have their adherents and their pros and cons. Both growth and value investing have enjoyed periods where they enjoyed strong returns. And they have both endured periods where they have produced disappointing results.
What are the characteristics of growth and value investing? Is one approach better than another? Are there times when one should switch between the two investment philosophies?
Investors have enjoyed a strong rebound in stock prices since the March 2020 lows, but there is ample reason the believe the rally is over-extended and that the risk of a significant decline is significant.
The rally has produced a considerable amount of investor complacency, which has typically preceded market declines in the past. Evidence of the dangerous level of current investor optimism will be demonstrated in a series of charts. Examples of the extreme market valuation levels produced by this optimism will also be provided.
But first, a cautionary tale that stock markets do not always go up. …
Surge in SPACs is Classic Sign Of Risk Indifference
One of the most telling indications of speculative enthusiasm by investors is the popularity of SPACs aka blind pools. The willingness of investors to commit capital to an enterprise, hoping that the promoters will use the proceeds in some useful way, is tough to beat as an example of risk indifference.
Excesses carry the seeds of their demise, and so it is with SPACs. Their recent unprecedented popularity has resulted in a record number of pools of capital chasing merger candidates. This competition will drive up acquisition costs or produce lower…
Large Changes in IPO Activity Is a Useful Leading Indicator of Market Direction
The study of IPO activity has proven to be a useful part of a set of tools we use to measure investment sentiment which is a key component in evaluating market risk.
The most reliable leading indicator of market direction is derived from the greatest amplitude of change (rising or falling), with major changes in IPO activity tending to precede the opposite behaviour in stock market indices.
IPO activity is currently demonstrating a dramatic surge in activity which supports our thesis of the past few months that…
The Bitcoin chart suggests a greater probability of significant downside risk rather than further appreciation.
The halt of the 2021 rally was preceded by steady capital outflows from Bitcoin trading vehicles and suggests air may be leaking from the speculative balloon that characterized the current investment climate.
The weakness of Tesla shares and a reduction in call option buying supports this view and suggests that a change in investor psychology may be beginning.
Investor optimism and market valuations remain at extremes, which prompts us to maintain our view that risk/reward continues to be unattractive.
However, the current macro dominated investment…
History has taught that the surest way to generate superior investment returns is to identify extremes of investor sentiment and trade against consensus opinion.
We have published a series of posts illustrating the extreme investor optimism that continues to grip markets, with the chart above being perhaps the most compelling.
Capital inflows into global over the past months has exceeded the combined total of the past 12 years!
An old maxim is that market tops require broad participation of retail investors. That criterion seems to be fulfilled.
This strategy of trading against “the crowd” can be psychologically difficult, but we…
While the price of Bitcoin remains near all-time highs, there is evidence of waning enthusiasm for this poster child of the current speculative market environment.
The chart above illustrates that the pace of capital flows into publicly traded Bitcoin funds has steadily declined from the peak of late 2020 despite an increase in the number of available funds and a rising Bitcoin price.
This decline in Bitcoin capital flows, along with the recent underperformance of the Nasdaq versus the S&P 500 and a decline in call option buying, suggests that the current speculative fervour may be beginning to weaken.
The consensus opinion supporting the current level of extreme investor optimism is the expectation of considerable consumer pent-up demand which will be unleashed as the effects of the pandemic ease.
However, the level of consumer demand may not be what markets expect. Consumer spending on durable goods rose significantly in 2020 (chart above), leaving a question of how much residual demand remains.
Spending on services such as haircuts, travel etc. can be expected to rebound but will services produce the economic boost to support current market valuations?
Can we be sure the variants of the Coronavirus will not complicate the…
The recent surge in margin debt growth is the strongest in over 25 years, eclipsing even the spike seen previous to the top of the internet bubble in 2000, which provides additional evidence of the speculative mania that has gripped equity markets.
It may not be coincidental that the two other sharp increases on the chart above, in 2000 and 2007, preceded significant market pullbacks.
Stock markets continue to reflect a consensus view of a strong “V” shaped economic recovery and a quick transition to a post-pandemic world.
Our inclination is to question consensus views, which we will do in…