Active investment managers more bullish than ever

The average active manager is now leveraged long, according to NAAIM’s weekly survey:

Sustained bullishness is bearish, especially once the market starts to trend sideways. We don’t yet have that choppy sideways action on declining RSI that has been a death knell for rallies, but sooner or later it will emerge. If the market starts sidedays, this would complete the most bearish syndrome possible, though we already have a market that is overbought and overvalued, with overbullish sentiment and rising bond yields (John Hussman’s bearish syndrome that has nailed most major tops for decades).

In economic news, Q4’s negative GDP print supports the thesis that we entered a recession in the 2nd half of 2012, as leading indicators had been suggesting for months. It also comes right as the Citi Economic Surprise Index is again on the downward slope of its regular cycle, meaning surprises are more likely to be to the downside.

Hussman’s extreme risk syndrome present again

John Hussman does the best long-term statistical analysis of the broad equity market, bar none. He has identified a set of four conditions that has appeared at or just before significant tops in the stock market:

Overbought: S&P 500 within 3% of its upper Bollinger bands, at least 7% above its 52-week smoothing, and over 50% above its 4-year low

Overbullish: Investors Intelligence sentiment survey shows bulls above 52% and bears below 27%

Overvalued: Shiller P/E above 18 (it’s currently 23)

Rising yields: 10-year Treasury yields above their level of 6-months earlier.

This condition also appeared in 1929 (followed by a crash and 20 year bear market in real terms) and 1964 (stocks peaked in ’66 before going down 80% in real terms over the next 16 years). When stocks are overbought and overvalued, treasuries have fallen, and most investors are bullish, it is to your great advantage to eliminate market risk (sell your stocks or hedge them).

Phew, the storm has passed…

5-year view of positive-only maximum values for the NYSE TRIN* here:

Interactive Brokers

Boy, that squall just came out of nowhere, didn’t it? Thank god it’s behind us… looks like smooth sailing from here on.

I thought it was kind of neat to see this faulty, positive-only TRIN chart, since it highlights the really bad days. Here’s the complete picture of daily TRIN readings (3 years):

Stockcharts.com

Notice the symetry that forms over time: action and reaction. This picture is looking pretty lopsided at the moment, reflecting a very highly overbought market.

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*TRIN is a measure of breadth, useful for gauging the intensity of advances and declines.

Formula: (Advancing Issues / Declining Issues) / (Advancing Volume / Declining Volume)

When lots of stocks move together and volume picks up in the direction of the movement, you get a strong TRIN reading and you know that the movement could be more than just noise. Moving averages help you to identify overbought and oversold conditions.

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TICK

TICK* is usually considered a day-trader’s tool, but its longer-term moving averages are very information rich. It is a tool that would have helped keep you on the right side of the market for the last 24 months:

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Look at how useful the MACD has been. Very nice pattern here since the start of the bear market. From an overbought condition it gives a sell signal on a downward cross of the zero line. Once that is followed by a countervailing move large enough to reset momentum, the return to the zero line gives the signal to tighten up stops and a cross with gusto gives a buy signal.

Right now we’re at the zero and pointed down.

*TICK: Downticking stocks (hitting bid) minus upticking stocks (hitting ask) on the exchange at a given moment.