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Is The Most Hated Stock Market Bull Ready To Crumble?

May 9, 2016

The first answer that comes to one’s mind is yes, as this economic recovery has been nothing but an illusion. The unemployment rate might have dropped, but the way the BLS (Bureau of Labour Statistics) calculates this figure is questionable at best.  They conveniently do not include individuals who have stopped looking for a job in their calculation. Mind you, many of these people stopped looking for a job; not because they no longer want to work, but after trying a countless number of times without success, they simply gave up and assumed they would never land a job.  The majority of the new jobs created are low paying jobs and in many cases, they are only part time jobs. Many individuals are working two and sometimes three jobs just to be able to make ends meet; this is not a sign of an improving economy.  Over 6.5 million Americans work part-time jobs, but all of them seek full-time jobs; before the so-called great recession, only 4.5 million Americans worked part-time and more importantly, we did not waste trillions of dollars trying to create an illusion that all was well.  This money could have been put to better use, but it was not and the same will hold true going forward. Instead of trying to deal with the underlying issues, more money will be flushed down the toilet to maintain the illusion that things are not so bad.

The corporate world issues several signals that all is not well; more companies are cutting their dividends in a sign that all is not well on the economic frontier. However, an even clearly signal comes from the number of companies using stock buybacks to boost their EPS.  None of the companies are going to state this in the open, but if you calculate many of the companies that have announced massive share buybacks in the past 2-3 years, you will notice that a large percentage of them would not make their earnings or appear to grow their earnings without these share buyback programs.  This is why every year during this so-called fake economic recovery the dollar amount dedicated to share buybacks has risen and will continue to rise in the foreseeable future; it is the easiest way to boost earnings.

All these factors and more would lead you to believe that the market should have crashed long ago. However, it has continued to trend higher.  The forces behind the market are divorced from reality. It’s hot money that is powering this market and will continue to power this market.  This is why this is probably the most hated bull market in the history of all bull markets.  The world is embracing negative rates and so that means that even more hot money will flow into this market.  It will lower the cost of borrowing, and the corporate world will go on feeding frenzy once negative rates hit the US.

Thus even though logic dictates that this market is ready to crash and burn, it probably will not. We will witness extreme moves in volatility, and many will mistake strong corrections for crashes; Aug of 2015 and Jan 2016 are two such examples that had the bears and naysayers out in full force yelling that the world was about to end.  We expect the markets to experience stronger and stronger corrections, the higher it trends, but this market will not crash until the masses are finally forced to embrace this bull market.

We can see that the mass mindset is still not ready to give up; this is reflected in the story below; 

Amid its biggest about-face in nine decades, a funny thing has happened in the U.S. stock market, where rather than loosen their grip bears have grown ever-more impassioned. They’ve sent short interest to an eight-year high and above $1 trillion, by one analyst’s math. Position reports from the Commodity Futures Trading Commission show mutual fund managers are more skeptical now than any time since at least 2010. Full Story

The bears are shorting the market to the tune of $1 trillion. Sure this could trigger a correction, but they started to short so long ago, that at the height of the correction, they might if they are lucky hit breakeven. Do you think they will have the sense to bail out at that point? Well, we hope so, but history indicates otherwise; they will be chagrined and start screaming from the top of their lungs that the end is nigh, and that is when the markets will bottom again.  The subsequent rally will erase any temporary gains they might have experienced forever.  We have stated over and over again that the stronger the correction, the better the buying opportunity for a long time, most recently in Aug of 2015 and Jan of 2016, for one simple reason; the masses cannot win. History is clearly indicative of this; from the tulip bubble to the financial crisis of 2008, the masses were always on the wrong side of the markets. 

Credit Suisse Group AG’s Fear Barometer is triggering a bullish signal from a contrarian perspective

The index, which measures the opportunity cost of buying protection against a decline in stocks, usually sees increases like this due to higher demand for "puts," or options which give investors the right to sell equities, and lower demand for "calls," which give the right to buy. Specifically, the barometer calculates how far "out of the money" an investor would have to go to purchase a three-month put on the S&P 500 that is the same price as a 10-percent out of the money three-month call option. This time, however, the firm says the entire move was driven by lower demand for calls.This means that people are putting a much higher probability on stocks falling rather than rising. "The derivatives market is assigning less than 1 percent probability the market will rise by 10 percent in the next three months vs. 17 percent probability it will fall by 10 percent," wrote Credit Suisse's Mandy Xu. Full Story

Game plan

The markets are rather overbought and begging for a reason to let out some steam. Given the strong run up the markets have experienced, it is a just question of time before they start to pull back.  The markets are extremely volatile so it would not surprise us if the Dow experiences a strong correction. However, do not confuse a correction for a crash. The Fed has indicated that it will do whatever is needed to keep this market afloat and maintain the illusion that all is well. They still have plenty of room to manoeuvre as we have not yet started to embrace negative rates.   While logic dictates this bull should crash and burn; the forces that are driving this market do not operate on those realms. 

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Courtesy of www.tacticalinvestor.com


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