Extreme Technicals And Sentiment
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Timing the market is extremely difficult. Indeed, it is almost a dogma that it is impossible to do. It cannot be done perfectly and is more art than science. Further, it is not a question of timing it to the day or being All In or All Out but a matter of degree. Nevertheless, with these qualifications, it can be done profitably and is the crowning skill of great trading. (See Barry Ritholtz, “The Truth About Market Timing”, March 13, for another recent take on market timing).
In this context, current conditions suggest that we may be very close to a major market top. Most importantly, we are now at the highs of the 2000 and 2007 bull markets. Since 2000, most market observers acknowledge that we have been in a secular bear market in which alternating cyclical bear and bull markets have resulted in no overall progress for the market. For stocks to continue higher, we will have to break through resistance that has capped the previous two bull markets and served as resistance for 13 years.
In addition to this serious overhead resistance, sentiment has entered euphoric territory. An excellent measure of sentiment is margin debt or the amount of money investors are borrowing from their brokers on margin. Looking at the attached chart of margin debt and the S&P 500 going back to 1999, note two things. First, the rise and fall of margin debt is highly correlated with rises and falls in the S&P. Second, current margin debt is now approaching the levels it reached at the 2007 top.
Also consider the Volatility Index or VIX, which measures options prices, closed at a 6 year low Monday. The last time the VIX was this low was February 26, 2007 and the very next day saw the largest spike in history (“Lowest VIX Close Since Day Before Biggest VIX Spike Ever”, Bill Luby, March 11).
The most recent Investor’s Intelligence survey also shows extreme bullishness. The number of bears dropped below 20% which Ryan Detrick, Chief Technician at Schaeffer’s, tweeted has correlated with intermediate market tops the last few years.
In addition to the extreme sentiment and technicals, seasonality and fundamentals also suggest we may be at a turning point. Michael Santoli wrote in a blog post yesterday that each of the last three years have had Spring tops followed by nasty corrections (“Will Stocks Third Time Around Be A Charm Or Hex?”, Michael Santoli, March 13).
Fundamentally, on Monday The Wall Street Journal’s Ahead of the Tape column noted how weak revenues have been: down 1% in last year’s 3rd quarter, up 4% in the 4th and forecast to be up just 1% in this year’s 1st quarter (“Investors Take A Rosy View Of Earnings”, Ahead of the Tape, March 11, C1).
Put all this technical, sentiment, seasonal and fundamental data together and it is my sense that we are very near a major market top.