Worhsipping At The Altar Of FOMO

Authored by Sven Henrich via NorthmanTrader.com,

Retail investors are worshipping at the altar of FOMO (fear of missing out). It may prove to be a painful experience.

Never before has retail gotten this aggressively exposed to stocks.

Just in time when central banks and buybacks are pulling back. I talked a bit about this in the recent The Carrot Top, but I want to expand a bit on this to issue a general warning for retail: The boat is fully loaded in one direction. Be aware.

Wall Street will not warn retail, they’ll keep pushing the envelope until the very bitter end. It’s actually quite easy to be a bull. Keep raising targets, always be optimistic, and when something breaks shrug your shoulders and say: Hey what are you gonna do? Stuff happens. The Fed will come to the rescue.

And the cycle begins anew.

You know the drill:

Just remember, Wall Street will never tell you to sell.#2008forecasts pic.twitter.com/c664pSO1No

— Sven Henrich (@NorthmanTrader) July 14, 2017

Remember the primary job of Wall Street is to get retail to invest, and to be fair, they are doing a fabulous job.

And so every December we see the same annual ritual. Here’s the message sent to retail, we can only go higher. $SPX targets for 2018:

Here’s a visual from BAML:

The primary argument: Wall Street is not yet euphoric:

Really? What’s this:

$DJIA futures weekly RSI 86.78.
Pedal to the metal till it melts. pic.twitter.com/NYLFODHht7

— Sven Henrich (@NorthmanTrader) December 4, 2017

Not euphoric? Let’s dig in a bit deeper into the data.

 

You may have seen my Rydex chart indicating record bullish allocations in The Carrot Top:

Last night Jesse Felder sent me some more data points confirming the same:

More data:

The American Association of Individual Investors’ asset-allocation poll shows members’ exposure to stocks are as heavy as it was near the 2000 peak. Cash allocations fell 1.2 percentage points to 13.9%. Cash allocations were last lower in December 1999 (12.0%).

Also:

TD Ameritrade’s Investor Movement Index of retail activity “saw its largest single-month increase ever in November, increasing over 15% to hit an all-time high of 8.53. TD Ameritrade clients were net buyers for the tenth consecutive month.”

Combine it with sentiment:

Via Reuters:

“52 percent said they believed the stock market could sustain continued growth for five years without a downturn of 10 percent or more.”

Confident much?

It’s actually the perfectly logical conclusion of what central bank interventions have wrought:

The BOJ balance sheet is now at 121% of GDP the ECB’s at 41% of GDP.

The result of course is we haven’t corrected at all. We are now in the longest market period without even a 5% correction. Ever:

We haven’t had a single down month in 2017 which historically has never happened either:

And the rush into long equity funds has been unprecedented:

Get us into stocks. We can’t go down, we can only go up. FOMO.

So when I say central banks have created a monster I really mean it.

And so it’s no surprise that central bank policy is viewed by some as the greatest risk to asset prices in 2018:

Mohammed El-Erian:

“The biggest risk to asset prices and the global economy would be if the biggest institutions reduce their monetary stimulus at the same time. Rather than reflecting the prospects of individual institutions, the greatest monetary policy uncertainty facing the global economy is what would happen if all these central banks, along with the People’s Bank of China, were to decide to reduce their monetary stimulus at the same time. When it comes to central banks, this is the biggest source of risk to asset prices and the global economy, and it would call for high-frequency policy monitoring and close international consultations.”

Asset prices are a central bank planned construct that has resulted in retail being completely long and fully exposed to equities.

And I have not even addressed the trillions of dollars exposure all being long short $VIX products:

BAML has a phrase for this: “Yield starvation forces selling volatility for yield”. “Forces” being the operative word:

Note the center piece: “Unprecedented central bank policy & low growth recovery”.

By the way I’m not picking on BAML here, not at all.

But I’m highlighting that 2017 has seen an unprecedented rush by retail into the most highly valued stock market since 1900 according to Goldman, a market that remains entirely uncorrected.

But nobody is issuing any risk warnings here. Keep going long my friends we can only go higher and if there’s a dip buy it. And no doubt this strategy has worked.

My perspective remains a variant one: This singularly oriented market construct is at extreme high risk that some trigger will pop all of this.

In a world where nothing has mattered and corrections have disappeared altogether it may be a fair question to ask what such a trigger may be. I’ll leave that for a future post, but I will say this: Triggers are often the excuse to assign cause after the fact. But it is the construct itself that seeds the depth of the ultimate unwind.

Worshippers at the altar of FOMO have come accustomed to no dip ever lasting. Will they find themselves slow to react when one does?

Are Investors Running Out Of Cash?

Via Dana Lyons" Tumblr,

One survey finds the lowest investor cash position since the stock market top in 2000.

We used to post a lot of these scary secular charts pertaining to long-term market related concerns. These charts pointed to conditions that, sooner or later, are bound to come home to roost. We were especially active peddlers in 2015 and back in 2012 when it appeared to us as if conditions were ripe for a potential cyclical stock market top, ala, 2000 or 2007. Of course, while the market did experience some turbulence during those times, a cyclical top obviously did not transpire.

With longer-term damage averted, market conditions improved following and in between those periods, opening the way for some of the sharp rallies we’ve experienced in recent years. And with those improved conditions, the immediate relevance of some of the longer-term concerns that we’ve long been monitoring greatly subsided. I don’t care how ominous stock valuations, for example, may be if the market is firing on all cylinders as it has been for much of the past 15 months.

Accordingly, our interest in posting such gloomy long-term charts also subsided during those periods. We are, after all, not interested in gratuitous fear-mongering – we are interested in helping investors make, or save, money.

What we do know is that these adverse long-term conditions have not gone away, and indeed have become more troublesome in some cases. Therefore, at some point, they will necessarily see their day of reckoning. As such, eventually they will assume relevance again within the marketplace discussion. We cannot be certain when that will be, but when we see statistics like the following, our antennae certainly gets raised some.

The statistic to which we are referring – and the subject of today’s Chart Of The Day – relates to the level of investor assets that is currently allocated to cash. This metric can carry important investor sentiment value as, historically, cash levels are low near market tops and become elevated at market bottoms. This particular metric comes from the American Association of Individual Investors (AAII) survey on investor allocation, and the current reading reeks of the former situation.

Specifically, the July 2017 reading of investor cash came in at 14.5%. This was the lowest level in the survey since January 2000. In fact, the only lower readings in the survey’s history back to 1987 occurred in January-April 1998, July 1999 and November 1999-January 2000.

Is now the time to freak out about this low cash position? Probably not. Remember, market conditions have to be ripe for these secular, or cyclical, types of issues to unleash their ramifications. Given the close proximity of most market averages to all-time highs, we don’t think we’re at that point yet.

That said, this is certainly a counterpoint to the “cash on the sidelines” argument. That just doesn’t appear to be accurate. So while a crash, or even a major market top, may not be imminent, background market conditions are not at all favorable for a further, prolonged advance.

Just our 2 cents.

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If you want this “all-access” version of Dana"s charts and research, he invites you to check out his new site, The Lyons Share. Thanks for reading!