by Jack Sparrow
Feeling sanguine about stocks? Here is a data point that should
give you pause. Via the AAII and
at the FT, holdings of cash are now
at their lowest levels since March of 2000.
"If that date sounds familiar," adds Mackintosh, "it should. The
dot com bubble was just about to pop, and the S&P 500 hit
levels not reached again for seven years."
Mackintosh further highlights the "bull-bear spread" (blue line)
as plotted against the S&P 500 (red line) in the multi-year
chart above (
click to enlarge
The bull-bear spread is a basic contrary indicator that is most
valuable at extremes.
When bulls greatly outnumber bears - as represented by
spikes in the spread - the market tends to run out of gas.
This makes sense because, when optimism peaks, those with an
urge to buy have mostly done so. Conversely, the bull-bear spread
did a great job of highlighting the March 2009 lows, which came at
a pessimistic extreme.
As you can see, at current levels,
the bull-bear spread is at record highs
(with cash holdings at decade lows). Complacency is rampant. So why
haven't stocks roared even more? Because a good portion of that
bullishness has been focused on corporate credit markets alongside
Bulls argue that the S&P is still reasonably priced, based
on a forward earnings multiple in the 12.5 range. But this
assumption depends on a far more speculative one -
that corporate earnings have not hit a cyclical
The twin threats of post-stimulus slowdown and housing double dip
threaten this belief.
What really matters now is whether the U.S. economy is in true
recovery or not. If the answer is "yes," then the Fed is behind the
curve and QE2 will serve as just another inflationary paper asset
If the answer is "no," then the great body of evidence
suggests QE2 will fail
- and investors will be punished harshly for taking their
complacency to such extremes.
: As active traders, authors may have positions long or short in
any securities mentioned. Full disclaimer can be found
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