Prior to the sell-off earlier this week, we opined that "per experience, the first dip in stocks tends to get bought".
Admittedly, we didn't even get a proper dip yet, so we suspect that that is yet to come. A single big down day means nothing. However, it still qualifies as a 'warning shot', especially as the subsequent rebound has occurred on even lower volume than we have seen previously.
A dip and immediate rebound in the SPX on even lower volume than usual.
Abby Joseph Cohen has just chimed in to let us know that she has never met a stock market she didn't like (yes, that is considered news these days…), because 'more investors are leaving the sidelines', allegedly.
Consider for a moment that this is probably one of the highest paid stock market strategists on Wall Street, practically a living legend among the permabull set.
Permabull is of course the safe thing to be on Wall Street, as A) nobody wants to hear bearish news and B) the market rises about 67% of the time, so by not trying to guess what it will actually do but instead staying bullish all the time, you ensure a two thirds hit rate. It's only a minor problem if/when there's a 60% crash like in 2007-2008, because you can always rest assured that 95% of your colleagues were caught out as well. Nice job if you can get it.
However, what's this 'sidelines' nonsense? There is no such thing as 'money on the sidelines': all stocks are always owned by someone, and those someones are by definition not 'on the sidelines'. If those not owning stocks at present buy some, then they must buy them from their current owners: so as one investor moves away from the 'sidelines', another takes his place. This entire 'sidelines' and 'sitting on the fence' and 'getting off the sidelines/fence' mantra is in other words complete rubbish.
However, this evidently doesn't keep one of the highest paid stock market strategists on WS from uttering it. As we said above, nice job if you can get it. You don't even need to understand the most simple, basic stuff. What else did she say? You have exactly one guess. First the 'sidelines' nonsense and then – see the highlighted part below:
“There have been better U.S. economic data and a growing sense that "there is money on the sidelines that is coming into the markets right now and I think many institutional investors are either coming back in or at least preparing themselves to come back into the U.S. equity market," Cohen said.
She said stocks are undervalued. Using one particular metric, she said stocks on the Standard & Poor's 500 appear to have priced in a 7 percent decline in corporate profits for each of the next five years.” (emphasis added)
Mrs. Cohen doesn't let us in on what that 'one metric' is by which she has determined the alleged 'undervaluation' of the market, but as we have pointed out many times before: in secular bear markets, valuations tend to go to levels no-one believes are possible before it actually happens.
We have discussed the valuation question on several occasions already (here is the most recent post on the topic), and as we have pointed out, as soon as one uses the Shiller P/E ratio or even an abridged three year version of it, it turns out this market is just as overvalued as it was in 1929, 1937, 1966 and 1973. Only the year 2000 mania peak stands out as a unique case of extreme overvaluation that stands even above these historic tops.
From a technical perspective, bulls have to be worried by the fact that the broader market remains so much weaker than the both the SPX and the NDX (the latter has of course AAPL as its biggest weight). Consider the two charts below in this context:
The SPX has reached its 2011 high, but the NYA remains far below it.
A different way of looking at the same thing: the NYA-SPX ratio
As Mark Hulbert points out, insiders have begun to be even bigger sellers than they already were in December and January. In the excerpts below we also include his qualifier – "insiders are not always right". Alas, very often they are.
“Corporate insiders continue to sell shares of their companies at a well-above-average pace.
In fact, they are behaving even more bearishly than one month ago. And that’s really saying something, since — as I reported then — their pace of selling in early February was the highest since last July, right before the bottom dropped out of the market.
Consider a ratio of the number of shares that insiders have sold to the number that they have bought. In the week ending last Friday, according to the Vickers Weekly Insider Report, published by Argus Research, this sell-to-buy ratio stood at 6.56-to-1. A month ago, in contrast, it was 5.77-to-1. As Vickers editor David Coleman writes: “We have not seen such a consistent number of sales reported by insiders since May 2011, with overall selling elevated for five consecutive weeks now. When this last happened, a correction came a callin’.”
To be sure, the insiders aren’t always right about the market’s near-term direction. They were far too bullish at the top of the bull market in 2007, for example. But more often than not they turn out to be right, which makes sense given their access to inside information and insight.”
As you can see from the chart below, insider selling and buying is not always useful for short term timing purposes. As it were, insider buying is a more reliable indicator than insider selling.
From Sentimentrader: Insiders are selling, but their selling is not always a good short term indicator. Insider buying tends to be more reliable.
Meanwhile, according to Sentimentrader, it was noteworthy on the sentiment front that a number of fund managers turned bearish right after the big down day earlier this week. This is based on the NAAIM survey (this survey allows managers to indicate a confidence level of between '200% short' and '200% long'). Many other sentiment indicators have also dipped slightly from the extreme levels seen previously.
We would guess that this means that there could be more short term upside, especially as there is still a lot of liquidity sloshing around in the system. However, at the same time, the medium to long term outlook of the market keeps deteriorating and the risk-reward equation seems decidedly skewed toward risk. The current rally reminds us of the other low-volatility advances we have seen prior to bigger corrections in both 2010 and 2011. Bears who warned that the market was looking overextended were generally 'early' in both instances, but once the corrections arrived, many months of gains were erased within days or weeks.