"Risk is not high, it is extreme."

Discussion in 'Wall St. News' started by ByLoSellHi, Sep 22, 2009.

  1. http://globaleconomicanalysis.blogspot.com/2009/09/buy-dip-mentality-fully-entrenched.html

    Tuesday, September 22, 2009

    "Buy The Dip" Mentality Fully Entrenched

    Anyone following the markets knows there is a huge underlying bid.

    Among individual investors as well as fund managers “Buy the Dip” Mentality Prevails.

    Claymore's Schwager believes the high levels of cash on the sidelines coupled with increased risk-taking will result in buy-the-dip behavior and provide a downside buffer. The “buy the dip” mentality was evident last week after investors surfaced following sharp losses on the prior Friday (8/14) and then again last Monday. As mentioned in recent weeks, there were large levels of cash on the sidelines.

    According to the Investment Company Institute (ICI) there was $3.6 trillion sitting in money market mutual funds during the week ended August 19. While cash levels are down from the $3.9 trillion reached in mid-January, the current level remains 1.5 times higher than the 10-year average.

    This, coupled with anecdotal evidence that large institutional investors remain underweight in equities, seems to be fostering a fear-of-missing-the-rally mentality. From a portfolio manager’s perspective, the second worst thing to actually losing money is underperforming your benchmark. Being underweight stocks and overweight cash would generally hold back performance in an environment of rapidly rising stock prices.

    Sideline Cash Myth

    Anyone advising clients to "buy the dip" based on sideline cash shows a fundamental lack of knowledge about how markets work.

    For every buyer of securities there is a seller except at IPO time, secondary offerings, ect. Thus, it is virtually impossible for money to come into the market in normal day-to-day trading transactions.

    For example: If one firm invests $100,000 in equities, then another firm will be selling $100,000 million in securities. The end result of the transaction is "sideline cash" moves from firm A to firm B.

    Furthermore, because of monetary printing, one should expect the amount of "sideline cash" to rise over time. Sideline cash is higher than it was 10 years ago and will be higher 10 years from now barring a huge number of IPOs or secondary offerings that would suck up some of that sideline cash or a period of heavy monetary draining by the Fed.

    Why Is The Market Going Up?

    The market is going up because sentiment has changed. Buyers have become more aggressive, in relation to sellers. Sellers want more for their shares. There is a near panic "have to get in" attitude among retail investors.

    Finally, rather than looking at sideline cash numbers in aggregate, one should look at Mutual Fund (MuFu) cash levels instead.

    Please consider Rally in 6th Inning or Top of the 12th?

    The opinion that the market can and will continue to rise is becoming ever more widespread, and ironically the bulls ALL say the same thing, namely "everybody else is bearish".

    Mutual fund (MuFu) managers are not bearish, that much is certain. At 4.2%, the the MuFu cash-to-assets ratio is one of the lowest in history, in fact lower than at the 2000 top, and only a hair above the 2007 low. Those stats (from a friend) are from July. Given the continued rally, MuFu cash on hand has probably decreased even more in August.

    The Dow's dividend yield is now at the level of the the 1968 top and the September 1929 top. Good luck with that!

    Unlike sideline cash numbers in aggregate, MuFu cash levels might be considered a measure of sentiment, and if anything, those cash levels would suggest most fund managers are already "all in".

    Investors Optimistic

    Today the Financial Times is reporting Investors optimistic on rally.

    Investors became increasingly willing in the third quarter to bet that the current rally driven by rising appetite for risky assets has further to go.

    Research by Barclays Capital, drawing on opinions from hedge funds, asset managers and traders from institutions across Europe, Asia and the US, showed that more than half of the 820 respondents felt the rally seen in the third quarter was sustainable.

    This was in marked contrast to the wealth manager’s last investor sentiment survey published in June – when the majority of investors interviewed believed the then-powerful rally from March lows was a short-term correction.

    Now, only 19 per cent believe they are still witnessing a bear market rally and are expecting a significant downward correction in the coming months.

    “Recent data have surprised to the upside and more and more bears who were previously sitting on the sidelines have capitulated and are joining in.”

    Insiders Sell Hand Over Fist

    Meanwhile, as retail investors and fund managers chase a rally running on extreme sentiment, Corporate insiders continue to increase the pace of their selling.

    The bravest face you can put on corporate-insider behavior right now is to point out that they're often early -- anticipating market moves by as much as 12 months in advance.

    But otherwise the message from the insiders is rather sobering: They are selling a whole lot more of their companies' stock than they are buying. The net difference is even larger than it was two months ago, when I noted that insiders were already selling at a greater pace than at any time since the top of the bull market in the fall of 2007. [See Insiders Are Selling - July 28, 2009]

    Consider the latest data from the Vickers Weekly Insider Report, published by Argus Research. For the week ended last Friday, according to Vickers, insiders sold 6.31 shares for every one than they bought. The comparable ratio two months ago was 4.16-to-1, and at the March lows the ratio was 0.34-to-1.

    As Vickers editor David Coleman puts it in the latest issue of his newsletter: "Given the dramatic decline in our sell/buy ratios over a relatively short period of time and the robust rally we have seen in the broad market averages, we expect the overall markets to trade flat to downward in the intermediate term -- and with increasing volatility. Overall insider sentiment is bearish by nearly all metrics we track."

    As Hulbert mentioned, insiders are not always right. Moreover one should not use insiders buys and sells as a timing device but rather a gauge of sentiment, and that sentiment is as extreme as it gets.

    Thus, suggestions to "Buy the Dip" based on sideline cash not only shows a lack of understanding about how markets work, they also show a lack of understanding about how extreme sentiment is among retail investors and fund managers, even as insiders (who likely know much more about business fundamentals) are selling hand over fist.

    Risk is not high, it is extreme.

    Mike "Mish" Shedlock
  2. How about the mining sector?:)

    About the OP.

    Mish has a great blog with great information and analysis but the way he laughed at dollar bears and inflation believers when the dollar rallied one month in 08 really was tacky.

    I watched an interview with him in which he claimed to be one out of 6 investors out of 10.000 who have predicted deflation instead of inflation.


    Great for you Mish and here we are a few % above all time lows on the dollar index.

    He didn't believe in the reinflation trade yet here we are.

    Can it continue? Who knows.
  3. This is the inflation scare that Dent talks about. I agree with him that we'll see a 6 or 7% on 30 yr notes then the rug will be pulled. They are done with this rally when they are ready to park their funds in long term tsys. Until then "inflation" scares will continue. We are at a critical juncture on Euro, do I have a clue where it is going? Sure as hell don't, I stopped worrying, I just take 20-25pip targets with equal or smaller stops. If we print 1.00 or 2.25 on Euro I could care less.

    Risk is beyond high, it is immeasurable, the babyboomer generation who runs this country is the biggest group of crooks that ever walked this earth. When they have left their posts, moved funds offshore, and are living a fat retirement they will be looking around laughing at all the vultures eating one another.
  4. I've been short for the past 60 SPX points (and long dollars) and I'm close to throwing in the towel.

    Bottom line: Despite all the bearish bullshit you post, the economy is doing 10 times better than any of us bears from 2007 could have imagined.

    Taking cues from bloggers and the media is death-they have a self invested bear slant.

    Cases in point: There has been story after story about the NFL maybe needing to soften their blackout policy on televised non-sellouts. The reality? ONE GAME has been blacked out the first two weeks.

    Another: "Ghost buildings" in Miami. The dirty unpublished secret? Around 75% of those units have sold since July 1 and not for pennies on the dollar but for only 35-50% off. In L.A. a troubled downtown loft developer went to auction last weekend and sold EVERY UNIT with only a few going cheap. From what I hear there was a buying frenzy at the end of the sale from locked out buyers. Funny but I'm yet to see that story ANYWHERE but in the L.A. media.

    Like a few others, I too don't know ONE PERSON who is unemployed. And the ones I know who're on the edge were on the edge in the best of times like 2006, 1999 etc.

    Brazil is like 75% of the way back to the highs. Care to guess the unemployment rate there? Higher than even Detroit lol. Just like 15% joblessness in Michigan doesn't stop 80k people from jamming Ford Field, tent cities in Brazil don't effect the millions of bourgeois working, shopping and spending in Sao Paulo.

    This is haves vs. have nots and I hate to say it but the global markets have discounted the lack of purchasing power of the have nots for years now.

    A Mexican construction worker being unemployed in San Diego is not news. A factory worker in Ohio being laid off is not news. Banks with unsold inventory is not news. NEWS would be a 60k a year executive assistant at a law firm being fired. It ain't happening. Until it does your bear articles are nothing more than still in Q1 hysteria.

    And btw: A mod told me that you've personally blown out more short selling ET'ers on this board than anyone.
  5. "Insiders Sell Hand Over Fist"

    If I had a buck for every time I've seen that lame quote the last few months...

    About the last time I recall seeing Insiders Buy Hand Over Fist being bandied about with such frequency, was right at the top (before the meltdown).:D

    Interesting to see the same contrarian advice was an excellent indicator to buy the most recent bottom. I knew people who would never be shaken out, that were this last bottom, thanks to proliferation of posts like this thread; that was one good piece of evidence to buy. I guess we should wait to start seeing the insider's buying like crazy before we should actually worry.
  6. Mvic


    No one is talking about the ECRI growth index either.
  7. I hate to say this bro but I even used you as an indicator.

    Hopefully you know I think you're super bright (and a great guy) BUT that doesn't mean you can't be wrong. So when you posted last week and mentioned you were long it got me bearish. Not because I consider you a fade-far from it. I just deduced by virtue of you bragging you were long-after a bit of absence from posting on ET while you were initially stuck short - that perhaps your exuberance was a sign of topping.

    Well, looks like my loss is your gain! :D
  8. Well, that kind of begs the question of why the developer was in "trouble" If there was this buying frenzy of which you speak, why did he need to have an auction? You got a link to an article?

    Oh, and as a counter to your NFL attendance observations, the following:

  9. oraclewizard77

    oraclewizard77 Moderator

    One can be right but the market can be irrational longer than you can be solvent.

    I personally think the market is due for a good sized pullback, but since I trade during the day, I base trades on price action for that day.

    Also, remember there is always someone better and richer than you and he's probably on the other side of your trade. You may have felt very smart going short, and that may be what he wanted you to think.

    This is poker not chess, and the market will try to bluff you. It may make you think its time to short, then once you are trapped, rip higher. It then has the power to keep going up till it hits your stop or you get margined called out.

    Same with the reverse, the market will go down one day, people will buy and it will keep going down, but that day is not today.
  10. He was in trouble because 6 months ago nothing was moving and he was priced high. Now he's flush.


    And BTW: Your Tampa Bay article is from APRIL.

    Since I'm in Florida I let my (ex)girlfriend scalp my Bears seats to pay the expenses of our condo in Chicago. 2007: 11.5k, 2008:11.5k, 2009:12K

    So she got $500 more this year than two years ago when the Bears were defending NFC champs.

    #10     Sep 22, 2009