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:
— 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:
— 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:
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%).
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:
“52 percent said they believed the stock market could sustain continued growth for five years without a downturn of 10 percent or more.”
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:
“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?
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Categories: Market Analysis