US Equity Bears are Gone….Again

The S&P500 inched up a fraction last week on volume that was shortened by the Thanksgiving holiday. Contradicting the move up in price was the increase in volatility—the VIX index closed higher for the week.

Also contradicting the move up in US equity prices, was the slew of US economic reports from last week, reports that were thoroughly poor. Starting with the Chicago Fed national activity index and ending with the Chicago PMI, the results were very disappointing, missing consensus estimates by meaningful margins. In between, PMI flash services, FHFA housing prices, consumer confidence, the Richmond Fed manufacturing index, personal income, personal spending, durable good orders (ex-transportation). jobless claims, consumer sentiment, new home sales and pending home sales ALL missed! Only the Dallas Fed manufacturing survey beat expectations and even then by only the slimmest of margins.

Around the world, China is continuing to slow down sharply. Japan has entered a recession—again. And Germany, plus much of the rest of western Europe is slowing down notably.

Oil prices are collapsing and Dr Copper is down to 2010 lows.

Yet US stocks are at all-time highs.

And interestingly, the percent of bears among professional advisors has hit another bull market low. According to the Investor Intelligence weekly survey, the ratio of bears has fallen to 13%. At the same time, the percent of bulls, among professionals, has risen to almost 57%.

This begs the question—-if only 13% of advisors are bearish on US stocks, then WHO is left to buy more equities and drive the markets much higher?

Sure, money trickles into the markets monthly from withholding from peoples’ paychecks, but the big shift into stocks has already happened. The “fuel” to power additional big moves higher has been spent.

And now that the Fed—at least for now—has suspended its latest money printing program, there isn’t another large supply of cash that’s available anywhere else.

Finally, corporate stock buybacks are slowing—partly because the cost of borrowing is rising and partly because the corporations are already so levered. So even this tactic looks like it will no longer be working.

So we will wait and see if John Hussman is right by arguing that US stock market indices are over 100% above their “historically-informed” fair values and that when markets get stretched to the degree that they are now, they tend to correct in abrupt and dramatic lurches, now in gradual and steady retreats.

If so, then “monetizing” all the paper gains that investors have enjoyed over the last four years will be a challenge because WHO will buy everyone’s stock—at the all-time high prices—when everyone already owns them and nobody is left to buy?


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