Knowing when to sell is always the hardest thing about investing. After years of rising prices, we all have a sense of worry about pending doom. But, really that “wall of worry” is a characteristic that remains pervasive through all RISING market trends. We always think the end is right around the corner. In my experience, it’s really when that sense of worry is gone and greed dominates the air space, that we have to seriously consider sticking our money under the mattress. But even sentiment toward the markets doesn’t just flip on one day. It erodes over time, just like market participation, and sector break downs, currency devaluations and confidence. Our job, inherent to our Net Exposure system, is to stack up all of this stuff in order to determine how much money we should have exposed to the markets. The weight of evidence is stacking up leading us to cut exposure (again).
Sentiment – Now Worse Than July!
Sentiment figures reported are almost always contrarian in nature. We monitor them through the good work of Jason Goepfert of Sentimentrader.com . Back in June and July, every seemed to be worried about a major decline (“smart” money and “dumb” money.). Dumb money is of course regularly wrong on the short term direction of the market and represents the vast majority of investors. Smart money is more often right on the future direction but not perfectly. When both groups are at extremes - opposite each other – these are the moments we need to be especially vigilant. Take a look a this YTD chart of the two groups, provided by Sentimentrader.com
There are several important things happening here. First, let your eye fall to the late July period when both smart and dump money readings were BOTH sitting on the .50 line. This was a time when we saw virtually no extreme readings which equals no opportunity to either sell or buy the market. From that time into the lows in late September, we had a clear set up to….. BUY. The Dumb money finally sold everything and the Smart money was at its most bullish confident position of the year (blue spike). This was when we sent out our note – Calling All Cars – Time to add to your accounts. Remember that? Now, here’s the important part. After a huge rebound in the market back up to the old highs as of yesterday, we now have exactly the opposite situation and really the second clear moment when Dumb money is again overly confident and Smart money is showing one of its lowest levels of confidence. As I said earlier, when we see extremes in both groups, we often have an actionable moment as investors. In a nutshell, from a sentiment perspective, this set up is far more serious than anything we have seen since February. This is not good and we have cut exposure in all portfolios today as a result.
Consumer Confidence - Weak
Along those lines, in the last several months, we have seen consumer confidence numbers get significantly weaker. Consumer confidence, like real estate and jobless claims has been one of those things that we have become accustomed to leaning on as an indication that the economy is still on strong footing. We couldn’t know what drives a consumer to feel confident (or not) but the survey results are what they are. If I had to guess, it would be some combination of basic fear (lots of negative news out there) and a brooding sense that our earned dollars are just not getting us as far as they used to. Personally I am disgusted with the new costs of healthcare insurance for my family and employees of our firm. Eating out has become almost prohibitively expensive, taxes are crushing everything by way of sales, property and income. Services are crazy expensive and that’s where we spend more and more of our money. How about your cable or mobile phone bill? Did you ever think you’d be spending $300/ month on that stuff? Yes some of this is discretionary. At the same time, I continue to hear only about how cheap gas is such a “Windfall” gain to households. Yes, I am saving approximately $40/ month now due to lower gas prices. My monthly healthcare premium just went up $400/ month. I can see you nodding your head in agreement. You get it. Back to the point. Consumer confidence falling in the weeks ahead of the biggest blow out moment in US consumption is also probably not a good thing. This adds to our growing stack of negative indicators, especially as it relates to the consumer discretionary sector. Note – take a quick look at what’s happening in the consumer sector (cyclicals/ discretionary). One name is keeping the entire sector afloat – Amazon. The rest of them have already sunk – Macys. The middle chart is the consumer discretionary ETF (XLY). This is a common story of winners and losers all within a sector. We’re seeing it in technology, financials, transportation and healthcare. It is the reason why I still like stock picking strategies now. At least they have a chance to pick off winners while your every day mutual fund or “packaged” investment portfolio with naturally own both winners and losers. Second note – do not buy Amazon now please. We cut our Amazon position in half last week putting a rather large gain in the bank for our New Power investors.
The ECB, the Federal Reserve and Other Stuff We’ll Never Understand
Today was one of those days that we could never understand. Why does the US dollar lose 2% when the ECB decides to cut rates and embark on another round of QE for Europe. The Euro should have declined leading to a rising US Dollar by the now broken rules of international finance. Why do our long term US Treasury bonds lose 2.72%? Do we suddenly have inflation in the system? Crazy. What I do see are two things happening. I see an entire financial system that is behaving oddly and I see modern portfolio theory failing badly. Modern portfolio theory says that when stocks fall, bonds rise is a flight to safety. So much for that. World stocks were down 1.4 – 3.5% today, bonds down in that range as well. Gold and select commodities were up slightly after making a six-year new low yesterday. Once again, I am entering ALL ASSET CLASSES DOWN YTD in my journal for today. Very odd.
Selling Pressure Still Dominant
Lowry’s Research does a great job of creating a Buying and Selling Pressure indicator, which is one of those inherent to our Net Exposure model. As you can see below, Selling Pressure moved to the dominant position in July and has remained so since even though we have seen all time new highs in the likes of the Nasdaq 100 and select other indices. I don’t like it. We were hoping to see Buying pressure regain the dominant position and it still might but a failure in the market now would accelerate the Selling pressure from it’s current dominant state. If we don’t see a quick rebound in stocks like tomorrow or early next week, the weight of this evidence will become heavy indeed.
Again, we never hear a clear bell indicating a top is now. Rather we see this weight of evidence unfold and let it paint a picture for us. For now, I don’t like what I see.
Sorry for the holiday lump of coal