• 506 days Will The ECB Continue To Hike Rates?
  • 506 days Forbes: Aramco Remains Largest Company In The Middle East
  • 508 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 908 days Could Crypto Overtake Traditional Investment?
  • 913 days Americans Still Quitting Jobs At Record Pace
  • 915 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 918 days Is The Dollar Too Strong?
  • 918 days Big Tech Disappoints Investors on Earnings Calls
  • 919 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 921 days China Is Quietly Trying To Distance Itself From Russia
  • 921 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 925 days Crypto Investors Won Big In 2021
  • 925 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 926 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 928 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 929 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 932 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 933 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 933 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 935 days Are NFTs About To Take Over Gaming?
Daniel Aaronson

Daniel Aaronson

Continental Capital Advisors

Continental Capital Advisors, LLC was formed to offset the destruction of wealth caused by the global devaluation of currencies by central banks. The name Continental…

Contact Author

Lee Markowitz

Lee Markowitz

Continental Capital Advisors

 

Contact Author

  1. Home
  2. Markets
  3. Other

Stocks Are On The Cusp Of A Major Decline

Equities have continued to rise even though the financial problems of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) remain unresolved. Bullish sentiment readings have reached extremes and investors have positioned themselves for a singular, bullish outcome. While some market observers view high investor bullishness as an indicator that stocks will continue to advance, we believe lopsided sentiment is the Achilles' heel for markets. In fact, all of the major declines in the past few years were preceded by extremes in bullish investor readings. Figure 1 shows that bulls now outnumber bears by the second largest percentage in the past 4 years. The last time the net percentage of bulls was as high as it is now was coincidentally just before the market topped in May 2011.

Figure 1. American Association of Individual Investors - % Bull Minus % Bears
American Association of Individual Investors - % Bull Minus % Bears
Sources: American Association of Individual Investors, Continental Capital Advisors

Investors have becoming increasingly bullish as bearish ones have become almost non-existent. Figure 2 shows that there are fewer bears today than at any other time since the beginning of 2007, including at the all-time high of the S&P 500 in October 2007.

Figure 2. American Association of Individual Investors - % of Bearish Investors
American Association of Individual Investors - % of Bearish Investors
Sources: American Association of Individual Investors, Continental Capital Advisors

Investors are also acting on their bullish sentiment. Figure 3 shows that the number of shares short on the NYSE as of 12/31/11 has collapsed since the stock market bottomed in October 2011. Notice that short interest was last this low just prior to the May 2011 peak.

Figure 3. NYSE Short Interest vs SPY Since October 2008
NYSE Short Interest vs SPY Since October 2008
Larger Image - Source: Zero Hedge

Despite high levels of optimism and lopsided investor positioning, investor participation has been declining. Figure 4 below shows that overall trading volume has declined for the past 4 years. Market technicians generally view rising prices favorably when accompanied by rising volumes. Thus, rising stock prices on declining volumes calls into question the durability of the recent market rally as well as the entire rally since the March 2009 bottom.

Figure 4. 50-Day Moving Average Of US Exchange-Listed Stocks
50-Day Moving Average Of US Exchange-Listed Stocks

The four-month rally that started at the October 2011 interim low has led to a surge in investor bullishness and positioning, which when combined with insurmountable sovereign debt problems, sets the backdrop for a major decline in equities.

 

Back to homepage

Leave a comment

Leave a comment