Tuesday , 19 March 2024

Is Now the Calm Before the Storm? (+2K Views)

I’d argue that the record low volume shows investors aren’t looking ahead as much as looking behind andbubbles reminiscing at how good things have been over the past five years or so. They’re expecting more of the same even though it’s mathematically impossible people.

The above are edited excerpts from an article* by Jesse Felder (thefelderreport.com) entiltled The Calm Before the Storm.

The following article is presented by Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (sample here) and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.

Low Volatility

When volatility gets as low as it has recently I take it as a sign of dangerous complacency, especially with the growing potential risks to stocks right now…Over the past 25 years there has only been one other period where volatility has been as low as it is today: July 2007, and prolonged periods of low volatility actually create more extreme, pent-up volatility. It works like this:

A stock market that goes months and months without anything more than mild pullbacks causes investors:

  • to be lulled into a sense of security or confidence that stocks just don’t go down anymore,
  • to extrapolate the recent benign price action far out into the future,
  • to start believing things like the “great moderation” line of bullshit’,
  • to become overconfident and over-commit to stocks,
  • to become surprised by the ‘extreme volatility’ when a pullback greater than just a few percent finally happens (which is really just normal volatility that has been dormant) and
  • to reduce the undue exposure they put on when they believed volatility was dead.

Add this to the normal selling that occurs and you get a greater than average sell off. Multiply all of these effects (to account for record low volume) from the beginning and that’s how you get a crash like we saw subsequent to the record low volume mid-2007. While there were all sorts of other issues that compounded to create the worst financial panic in a few generations that’s not about to happen again, but history does look like it could be rhyming in some ways right now.

High Margin Levels

…Jeff Gundlach has warned that when record high margin debt finally, and ominously, begins to reverse we could expect a double digit decline…and @jlyonsfundmgmt shared a great chart the other day showing the correlation between margin debt and the peaks of the past few bubbles.

I know: Correlation ≠ causation, but it still makes a great deal of sense to me that margin debt is greatly responsible for blowing up an equity bubble in the first place and when it peaks it’s a good sign that the bubble has run out of fuel.

Small Cap Weakness

We’ve seen some canaries croaking in this coal mine over the past couple of months. Biotech stocks, MoMos and the Russell 2000 have all taken it on the chin lately even while the major indexes have hovered near their all-time highs. @ukarlewitz noted late last week in his excellent “Weekly Market Summary” that, At more than 5 years, the current bull market (defined as a gain uninterrupted by a drawdown of more than 20% on a closing basis) is both longer and more powerful (on an inflation-adjusted basis) than either the one from 1982-87 or 2002-07. It is, in fact, longer than every bull market in the past century except the ones ending in 1929 and 2000. In other words, this exceptionally long advance without a 10% correction is occurring at the point where virtually every bull market has already ended.”

No, this doesn’t mean stocks are about to fall 20%+, but with record low volume over this span how many investors are prepared for such a scenario?

Enjoying this article? Then “Follow the munKNEE” on Twitter and Facebook and get access to every article as posted – and don’t forget to “follow” or “like” it while you’re there. It’s a great way to spread the word and your friends will appreciate it.

There are also divergences galore

  • [There is] weakness in the banks along with the small caps in contrast to the majors.
  • Maybe more important is what the smart money is doing. We haven’t seen a divergence this large between “emotional buying” and rational buying since – you guessed it – 2007.
  • Another noteworthy divergence/canary can be seen in junk bonds. Risk appetites there have also begun to reverse and this is typically a prelude to equity risk appetites reversing as well.

So what to junk bond investors see that equity investors don’t?

  • Maybe it’s that the latest episode of “reaching for yield” is about to come home to roost.
  • Maybe it’s the weakness in retail. TJX, HD, WFM, BBY, PETM and others have all disappointed investors over the past couple of weeks and we all know consumers make up 70% of the economy.
  • Maybe it’s the bursting of the bubble in profit margins.
  • Maybe it’s the bursting of the housing bubble in China.
  • Or maybe it’s just the fact that this cycle has run its course and is about to swing the other direction.

Who knows?

Conclusion

In any case, I’d argue that the record low volume shows investors aren’t looking ahead as much as looking behind and reminiscing at how good things have been over the past five years or so. They’re expecting more of the same even though it’s mathematically impossible people love to believe things even when they know they’re not true and, you know what, according to the Fed, this is the very definition of a bubble.

It might not be your father’s bubble but just because we haven’t matched the p/e’s achieved during the internet bubble doesn’t mean that we aren’t ridiculously overvalued today – and it’s increasingly likely this is just the calm before the storm.

Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://thefelderreport.com/2014/05/23/the-calm-before-the-storm/ (Copyright © 2014 Felder & Company, LLC, All rights reserved.)

Related Articles:

1. Should You Care What’s Happening On the Nikkei 225? YES! Here’s Why

Should markets around the world really care about what the Nikkei 225 Index does? The Power of the Pattern suggests “yes”! Here’s why. Read More »

2. Collapse of S&P 500 May Be Only Weeks Ahead! Here’s Why

When Staple sector (i.e. defensive) stocks started to reflect greater relative strength than Discretionary sector stocks back in 2000 and again in 2007, the S&P 500 began to fall dramatically in the ensuing months. That’s happening again. Can a collapse of the S&P 500 be far behind? Read More »

3. A 20%+ Sell-off is Brewing In the Lofty U.S. Stock Markets – Here’s Why & What the Future Holds

For today’s seriously overextended and overvalued US stock markets the best-case scenario is a full-blown correction approaching 20% emerging soon while the worst case is a new cyclical bear market that ultimately leads to catastrophic 50% losses. Read More »

4. Which Will It Be – 63 Years of Data Suggesting A Major Pullback Over the Next 6 Months OR the Power of This Market Rally?

Last year’s “Sell in May” period was only the third time since the turn of the century that stocks have posted double-digit gains from May through October so, with stocks still near all-time highs as the calendar flips to May, do the law of averages suggest we’re on the brink of a major pullback over the next six months? Read More »

5. 2 Stock Market Indicators Are Saying “Be careful, don’t get caught up in the euphoria”

In the midst of all the optimism we see towards key stock indices these days, there are two leading indicators that are flashing warning signals. They say, “Be careful, and don’t get caught up in the euphoria.” Read More »

6. Beginnings of Massive Stock Market Correction Developing: Don’t Delay, Prepare Today!

No stock can resist gravity forever. What goes up must eventually come down. This is especially true for stock prices that become grotesquely distorted. We have been – and still are – living in another dotcom bubble, and – like the last one – it is inevitable that it is going to burst. Read More »

7. 3 Historically Proven Market Indicators Warn of an Impending Market Top

It’s frustrating to see key stock indices keep pushing higher when historically proven market indicators are all warning of a crash ahead. Irrationality is exuberant to say the very least, and that’s why I believe this rally is counting its last days. Read More »

8. The Stock Market Is a Risky Place to Be – Here’s Why

With both the fundamentals and the technicals saying the stock market is a risky place to be, we await its crash back to reality. Here’s why. Read More »

9. There IS Danger Ahead for the Markets – Really! Here’s Why

We fail to pay attention to the warnings signs as long as we see no immediate danger and keep our foot pressed to the accelerator believing that since it hasn’t happened yet, it won’t. This time is only “different” from the perspective of the “why” and “when” the next major event occurs. Below are analyses and exhibits to support that contention. Read More »

10. We’re on the Precipice of a 50% Drop in the U. S. Stock Market! Here’s Why

Warren Buffett’s favorite indicator – the ratio of the value of U.S. stocks to GDP – is seen by him as a reliable gauge of where the market stands and these days it suggests that all the main indexes are pointing to an imminent 50% crash. Read More »

11. These Indicators Suggest Stock Market Returns Are “Too Good To Be True”

Current macro conditions indicate that we are in a sweet spot for equity returns…that global growth is continuing and there is little or no tail risk in the immediate future. It’s time to get long equities…but I have this nagging feeling that these market conditions are too good to be true. If you look, there are a number of technical and fundamental clouds on the horizon. Read More »

12. Bookmark This Article: The Stock Market Will Crash Within 6 Months!

Until recently, I have not used the term “stock market crash”. I do not take using this term lightly. It brings with it major repercussions. I am now breaking out this phrase because of the current state of the stock market. This stock market crash will occur within the next six months from today… The markets will fall within a combined day/few days a total of at least 20%. Bookmark this article. Read More »

13. The Best Stock Market Indicator – Ever

Below is a description of what I believe to be the best stock market indicator – ever. I am referring to the percentage of S&P 100 stocks above their 200 DMA which gives traders a clear early warning signal of impending serious market downturns and later safe re-entry points. Read More »

14. Margin Debt: It Doesn’t Matter ’til It Matters! Is Now the Time to Be Worried About the S&P 500?

It doesn’t matter until it matters! IF margin debt should start decreasing swiftly, history would suggest something different is taking place in the mind of aggressive investors. Will a decline in margin debt from all-time highs matter this time? Read More »