We had a very strong sell day on Friday, and much of the ink that was spilled over the following days was dedicated to convincing us that the blood is only beginning to flow.
But is it really time to break out the cautery? Grab the gauze box and squeeze the wound?
Time to throw on some cayenne pepper, maybe?
- MY. GAWD.
Before we get to the answer, consider some arguments in favor of the continued grand selloff hypothesis –
- Investor Complacency
Some swear by it, but we don’t see it, frankly. The AAII numbers that we watch show a very frightened Ma and Pa investing cohort that’s unable to do anything but sit on their thumbs. The last AAII bullish sentiment readings were 29.75, and the bearish were 28.48. That means we’re anything but complacent in the traditional sense. For that to be the case, we’d have to see at least 50 or 60% bulls. And we don’t.
What we do see is the neutral crowd in the lead by a longshot. Neutral, by the way, may as well be ‘neutered’ as far as the investment game goes. Someone who doesn’t have a position on the market is generally out of the game; he’s not just wondering whether he should be long or short. These days, he’s more likely involved in another project. Maybe he’s captivated by the elections, or the World series, or the kids getting back to school, or, if he lives in Chicago or Baltimore or St. Louis, with just commuting to work every day without catching a stray bullet.
The Prophetics of Neutral
But neutral numbers also teach us something else. Because they tend to grow precisely before the market bursts higher.
A plurality of neutrals are generally indicative of a great number of wannabe millionaires who’ll eventually jump on the bull too late. That’s just the nature of the beast. The average guy doesn’t clue in and start buying until it’s well past midnight, and then, well… the market’s already cold. By the time he piles on, the buying is more or less complete and the turn lower is ready to commence.
But we’re not there yet.
What we’re seeing now are a number of experts trotting out ‘meaningful’ charts, such as the one that follows, that indicate we’re already at a turning point precisely because investors are overly complacent. And how do they define complacent?
Have a look –
According to this so-called manager of funds, when the percentage of unchanged issues on the NYSE approaches 4%, something’s astir.
Not sure that’s an altogether correct or meaningful assessment, but more than that…
What’s interesting about charts like these is how partially right they are. Indeed, the light blue lines indicating high levels of unchanged issues on the NYSE often correlate with market tops, as fleeting as they may be. But equally convincing are those episodes where unchanged readings align either with market bottoms or no change in trend whatsoever. We’ve circled in green five such instances where that’s the case.
Which leads us to conclude that the current highest reading of unchanged issues in over ten years has a roughly 50/50 chance of proving meaningful.
- Election Fever
Another spoke in the bears’ market meltdown wheel is the issue of the presidential election, an event that has historically drummed up high levels of uncertainty, and with it, volatility.
Have a look at the following graphic –
The chart shows a traditional spike in ‘uncertainty’ between August and November, the very period we’ve just entered. And if this year holds true to form (in red), we could well see an upsurge of to-ing and fro-ing in the markets as the daily polls call out potential winners through October.
So we should expect the market to tank?
Not on your life.
There’s too much at stake here for the incumbent Democrats and none of the east coast establishmentarian set are interested in that uppity renegade from New York turning back the progressive tide. So be sure – they’ll pull out all the stops, hook and crook, to ensure stability on the indexes before November.
Fifth, P/Es on the S&P 500 are at historically inflated levels. As a whole, the index sits at the 84th percentile of its historical valuation. The median stock, however, is bloated, sitting in the 98th percentile.
And does that necessitate a market crash? Well, it doesn’t necessarily bode well for the long run, but valuations can also bubble to extreme levels and remain so for extended periods.
And that’s something we fully expect to occur as the indexes blast to all-time highs and draw in every junior high babysitter and summer job busboy who can muster a grand or two.
In short, we proclaim that valuations are no longer helpful for serious investors in search of market tops.
Trade! Trade! Trade!
Two trades to close before we move on to this week’s initiative.
The first was opened on April 12th in a letter called Imminent Inter-Galactic Planetary Barrage. There, we recommended three pairs of long/short trades using GM and Tesla with different expiries for a total credit of $6.22.
The first two pairings expired worthless. And today, we’re going to act on the third. We’re buying back the TSLA September 165 PUT for $0.05. Should the long GM PUT expire worthless this Friday, we’ll come away with $6.17 on the trade.
It’s looking good.
Next is our trade from July 19th. The letter was called Gold Gap Zeroes Out, and there we recommended you buy the GDXJ November 45 PUT for $4.00, and sell the GLD November 126 PUT for the same $4.00, creating a perfect zero premium initiative.
The GDXJs go for $3.40 and the GLDs for $2.85. Sell the former and buy back the latter and you come home with a healthy $0.55 per pair traded on nothing down. Accounting for minimal commissions, that’s 267% in just eight weeks.
Rockit, Huey! What’s up next!?
This week we play the fear just like we did at Brexit-time in late June. We’re counting on a very excited rise in the indexes in the very near term (until the election),and recommending you play it with a synthetic long position.
The details go like this –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew