Friday, December 4, 2009

An Old-Time Rerun - This Market's On Less Footing Than '07

It seems that we have returned to the "olden days" of the bubble era.  In fact, the words bubble, gold, bull market, and stocks seem to be popping up on finance web sites all over the virtual stratosphere.

To make things worse, on-the-street retail investors and those that represent them (hedge fund and mutual fund managers as indicated by equities vs cash holdings - averaging about 4% cash currently!) appear to be eating it up.  And we are at the point where we have discarded cutlery for the more subtle by-the-fistful type of gorging.  Where everyone is out to make up the severe beating their portfolios took last year.

As demonstrated in the following charts, we have seen by far the worst level of complacency since this bear market started.  This is highly indicative of a major turning point in equities price-movement and prime territory for a long-term shift in investor psychology and mood that will bring on the largest portion of this bear market.  We anticipate an imminent turn in equities within weeks (if not days) which will herald the sharpest and deepest declines in their perceived values.

The ratio of bears to bulls is almost at its highest point on the chart and is sporting the same near-vertical price movement that it did as the market topped out in late 2007.  From the market bottom, this ratio has gone up over 150% in quantitative terms indicating a massive shift in investor psychology.  Since this positive sentiment is based on nothing more than "hope" at this point in the game, it may (and likely will) reverse just as swiftly as it ascended and should make a new low on the Investor Intelligence ratio.

To further demonstrate the "hope" mentality that permeates current market psychology, the percentage of bears surveyed is at its lowest point in a decade.  This indicates both a complacency towards danger (for example, junk bond spreads have narrowed by over 50% relative to treasuries in the past 10 months while defaults are at their highest since the 1930's) , and a clinging to hope and extreme optimism.

Finally, we reiterate our advice.  Liquidate stocks and corporate, territorial, and municipal bond holdings and conserve cash by either holding actual dollars or their safest short-term equivalents.

Have a wonderful weekend!



  1. Based on the same facts, I came to the same conclusions as you. You show excellent insight and an enlightened knowledge of the economy and the financial markets. In the coming weeks its going to be "look out below."

  2. Derek,
    Thanks for your invaluable insight, I wish I had found your Blogs about 6 months ago.......
    I ( as an older person), cannot, and do not see how anyone can see the US dollar as a Flight to Saftey.
    In light of ALL the Gv't spending, and devaluation of our cuirrency, it's borderline idocy IMHO.
    How & why the USD index causes the rise and fall of the PM's in beyond my comprehension, it literally makes ZERO sense to / for them to remain valuated in sync with each other.
    Japan's threats to liquidate US Treasuries is bound to get someone's attention, if they have a brain.
    What happens when others see this, and rumblings are abounding about others doing likewise.
    Where's the safe HAVENS then?.
    I see a train wreck headed our way, as we continue this profligate monetization of our debt, and more Stimulus packages on the way.