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Financial Industry Insights from Advisors Asset Management
On October 19, 2015
AAM Viewpoints – Taking the Road Less Traveled. Finding Opportunities During Volatility
With a multitude of sentiment indicators in the bearish/extreme bearish category, it is a wonder how investors haven’t retired to their doomsday bunker to wait out the overwhelming economic collapse they believe is sure to come. So, as sentiment has continued its descent to panic, it reminds me to ask the most basic question, “What is the ultimate goal of each investor?” Inside that question one can ask, “What ‘game’ are you playing when you pony up to the table?”
Around the table/investment styles and options, you have a multitude of distinctly different games - much like the “Dogs Playing Poker” painting by C.M. Coolidge. One dog is playing “Texas Hold ‘Em,” one playing “Spades,” another playing “Go Fish” and yet another playing “UNO®.” However, the smallest but loudest is playing “52 card pick up.”
The continuing evolution of the “smartest bear in a correction” always continues to pronounce louder and louder why they are the only ones to see the coming doom of the market. Going by the most “scientific” (tongue in cheek) of research (Wikipedia), they list over 150 pronounced and public claims of the end of the world over the last 2000 years. Now, I may have not been a math major and I will have to re-check my math, but the success rate of these calls seem to be pretty poor.
You may argue that doomsday projections may not correlate with economic collapses, and you are right. In fact, you have a bigger magnitude of professionals and investors of all sorts calling for increased market collapses, especially recently considering the proliferation of bubbles bursting in the last 15 years. As we say, when you see one black swan, you are convinced a flock is right around the corner. Now bubbles bursting has increased with liquidity and ease of capital flows not just domestically, but globally.
So, the dog playing “52 card pick up” and market collapse crowd becomes more convinced they are the minority and the herd is just one happy go lucky, numb to any negative news, apathetic, rose colored glasses wearing, glass overflowing investor. Below is a summation of a multitude of sentiment indicators that should give every bearish investor believing they are in the majority pause for reflection.
Indicator
Current Reading
Merrill Lynch (ML) Global Fund Manager Survey
Fund managers’ cash position greater than 4.5% is a contrarian buy signal and has been above this buy signal 23 of the last 24 months. Two of the last three months are at levels not seen since February 2009, and 2003 before that.
Credit Suisse global Risk Appetite
After muddling in the middle of Panic & Euphoria, it has plummeted to the panic level. Current level is back at S&P downgrade of U.S. Treasury bonds and Bear Stearns collapse.
ML Sell Side indicator
Still in “extreme bearishness” where Wall Street Strategists are bullish (negative for future returns) or bearish (positive for future returns). Currently, it is in the extreme bearishness, meaning the potential for future positive returns are expected. According to Merrill Lynch, 12-month potential total return is 18%, based off of past measurements and current level is close to the March 2009 market bottom.
Investors Intelligence Sentiment
A measure of bulls minus bears registered a negative level (bears outnumbered bulls) at levels seen in October 2011, August 2010 and March 2009.
Citigroup Panic Euphoria Model
Registered in the panic mode for the fourth time in six years. Ironically it’s been in the euphoria area once in the last six years. Explains the cautious investor to be overly optimistic and invest in momentum of positive economic and market results going forward.
Bank of America ML Bull and Bear Index
Currently reading is at “extreme bearish” (near historic low) and has been this low in summer of 2011 and late 2008 and 2009.
NYSE Short Interest
At levels not seen since July 2008. Though it still was nine months away from market bottom, the comparison of the economy in 2008 to current is akin to comparing raisins to oranges.
Morgan Stanley Equity Correlation
Global equity correlations hit a 15-year high during the selloff in August and September. High correlations typically point to a massive risk-off trade where not only is the “baby thrown out with the bath water,” but the entire nursery as well.
Domestic Equity Fund Flows
Domestic equity rolling fund flows have reached levels seen in the 2011-2012 timeframe and early 2009 timeframe. It seems all those waiting for a correction are falling into the “penny wise pound foolish challenge.”
Sources: Merrill Lynch Bank of America, Credit Suisse, Citigroup, NYSE, Morgan Stanley, Pension Partners, Investors Intelligence
One thing that life teaches us is that the “road less traveled” is difficult, stressful, often lonely but also rewarding. We feel the fundamentals of the current economy and market leave this current corrective phase as an opportunity to target excess funds held in cash. We know that not only are fund managers sitting in cash, but so too are households who are maintaining over $10 trillion in deposits and U.S. commercial banks holding cash of $2.75 trillion.
As we contemplate our course of action, think about the goal you have, historical similarities and where you believe the economic puck is going rather than where it is. There are more than enough justifiable reasons to feel anxious; however, the resiliency of the markets and economy have continually been underestimated throughout history. One other little point about the doomsday prophets of the past: we have seen 47 of the more public prophecies that didn’t come to fruition of the 160 that came about in just the last 20 years.
Time to take a breath, reflect and consider which game is being played at the card table.
CRN: 2015-1002-4975R
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at https://www.aamlive.com/legal/commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.
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