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Bullish market sentiment is the most reliable indicator that financial markets are close to or even past their top

Posted on 12 January 2014 with 3 comments from readers

Everybody seems in very good heart as we go into the New Year. Asset price inflation has left most investors much better off. You can’t help but feel pleased with your performance and why not share your good humour with others?

However, this is also the most reliable indicator we know that indicates a market top. When everybody is fully invested and optimistic it is only then that things go wrong. Why? It is simple.

Beware buyers

Stock markets only rise and rise when there are buyers. Once everybody is all-in then the buyers dry up. Think of it as being like the law of gravity. Without new buyers there is only one way to attract them and that is to cut share prices. That is how markets work.

You don’t have to take our word for it. Consider the following ten points below from The Wellington Letter published by Dohmen Capital Research Group:

1. The Investors Intelligence survey of investment advisors shows only 14.1 per cent bears, the lowest since the 2007 bull market top. A huge 59.6 per cent are bullish. Such numbers are rarely seen, and are indicative of an important top ahead. The ratio of bulls to bears is the highest in 11 years.

2. The AAII (smaller investors group) shows the percentage of bulls at 55 per cent, a number only exceeded once in this last four year bull market.

3. The NAAIM (active money managers) indicate that their members are 98 per cent invested, the highest on record.

4. In 2013, we saw the most IPO’s since 2007 when the big bull market topped. Big IPO’s, like Hilton, indicate that the insiders are exiting by selling their stock to the less informed public and money managers.

5. Chinese IPOs are back on Wall Street. Greed has now overcome the stench of fraud in Chinese firms traded in the US. Even many of the big US hedge fund managers lost hundreds of millions of dollars but apparently are ready to jump back in.

6.Some of the top performing stocks in late 2013 were selling at astronomical valuations. Some have no earnings. This is like the boom going into March 2000 before the dot com bubble burst. Twitter is selling at 66 times sales. Imagine: even if the firm had zero expenses, it would take you 66 years to get the purchase price back assuming to sales growth.

7. We are hearing once again from analysts in the media: ‘The greatest danger is being out of the market.’ That statement has always struck us as ridiculous. The way to make money in the markets is by buying when risk is low, i.e. when stocks are depressed, and selling when stocks are very high. After a four year bull market, and last year’s big performance, we ask, ‘are stocks high or low?’

8. When you watch financial television, do you see anyone who is bearish on the market? They refer only to US economic fundamentals, but totally ignore the big credit crunch in China that will infect all of Asia.

9.Securitized car loans are being sold to investment funds just as subprime home loans (CD)’s) were sold to investors leading up to the crisis in 2008. Such loans are packaged in pools, and participations are sold around the world. The car loans are worse than home loans. Anyone who is breathing can qualify for a car loan now. Just bring a utility bill and your driver license.

10. Margin debt in stock portfolios is at a new, all-time high, just as it always is near a big market top. Sentiment is that it would be easy to reduce the debt if the market reverses. That’s what they thought in 2008, but the implosion was too fast.

Posted on 12 January 2014 Categories: Banking & Finance, Bond Markets, GCC Stock Markets, Hedge Funds, Investment Gurus, US Stocks

3 Comments posted by readers:

Comment by mousa omran - 12 January 2014

Another worrisome phenomenon is the price action of low price stocks, and the explosive moves in the biotech sector,where recent IPO activity has been especially heavy.

Comment by Marc Dagher - 14 January 2014

It’s all talk and hype. Global stock markets will witness the biggest rallies in the equities histyory in 2014 for the following reasons:

1. Europe is again thriving and on track to achieve greater economic outputs.
2. China is running out of stockpiles of coal, iron ore and everyday comodoties
3. The US banking system is extremely robust and going from strength to strength
4. The global economy has rebounded and showing signs of even greater outcomes
5. Emerging markets across the globe are thriving and will form the backbone of the new world economy as stated by the world bank 2012 report
6. Property prices’ indiex across the globe is stabilizing and improving
7. The stock market in 2014 will register a rise of 15-20% with a couple of small slumps of 3.5% in between.

Comment by Todd McFarlane - 11 February 2014

I’d encourage you to check out the Crosby Irrationality Index. It’s a measure the combines technical and fundamental indicators weighted by their predictive power.

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