In the span of 231 weeks since the January 2000 peak of the Dow Industrials, there have been only nine weeks in which bears have outnumbered bulls, according to data provided by Investor's Intelligence. In this period of time, Nasdaq suffered a near 80% drubbing and the S&P 500 fell exactly 50%. The last time bears outnumbered bulls in the weekly poll was October 2002, more than 20 months ago! In the meantime, the ten-week ratio of bulls to bears has surged to as high as 3.04, a milestone that would typically mark a nearby very major peak in prices and last week's reading of 55.7% bulls and only 17.5% bears brings sentiment right back to where it was when prices peaked.
Yale's One Year Confidence Index (http://icf.som.yale....nfidence.index/) devised by Robert Shiller, has two components, one for "investors" and one for institutions. The investor component soared to as high as 95.6% in January, only a couple of weeks before the peak in the Dow, and we don't think we need to tell you that sentiment cannot possibly rise above 100%. Or can it? The stats are in for Bulletin Board trading in May and there is no sign of let up in the enthusiasm shown by speculators and investors. Bear in mind, the Bulletin Board's own caveat that "There are no minimum quantitative standards which must be met by an issuer for its securities to be quoted on the OTCBB." Yet, what we view is enthusiasm that surely extends beyond 100%. Given that a veritable mania only generated trading of 467 million shares per day, what could one otherwise believe of volume that has now swelled to a rate of 2.2 billion shares per day?!
If you desire even more proof, just look at how margin debt is once again building. The combined totals for the NYSE and the NASD take us to where margin debt stood in October 1999, five months from one of the greatest blowoffs of all time, but the NASD numbers take us to the same levels as February 2000, only a few weeks before the peak! Although this measure bulged significantly last summer, the expansion may have been bond related, not stock related. There is another consideration as well; we cannot make any reasonable estimate of how much of home equity lines or refinancing monies are devoted to the purchase of stocks, but it must be considerable. All told, we view sentiment as incredibly complacent, as if no harm can come the market's way. Clearly, Wall Street and the media have done their job well and have convinced folks that the long term will do them proud, no matter the circumstances. But as we showed with our front page chart in the June 7th issue, the long term has taken as long as 32-1/2 years to produce a profit after inflation. As history has shown time and again, there is no free lunch, no matter how long you wait on line.
The Financial Times recently reported about the outlook for the global economy according to Pimco's Bill Gross, the only guy we know who manages $400 billion in bonds. Gross claimed, "Too much debt, geopolitical risk and several bubbles have created a very unstable environment which can turn any minute. More than any point in the past 20 or 30 years, there's potential for a reversal." Gross cited the "levered global economy" and his worry that "....a small movement can tip the boat." He also blasted "....the advent of financial alchemy" - in particular, the growing use of hedge funds." and described them as "basically unregulated banks." In referring to "financial alchemy," there can be no doubt that Gross is worried about the widening use of derivatives. In referring to the risks to the system that were posed by LTCM, Gross called for regulation and warned that hedge funds are taking leverage to an extreme as they "invest" in other areas, such as stocks, commodities and real estate. The last time we updated our perspective on derivatives in detail was in the January 20th issue. We hope to do so again in the upcoming July 19th issue. At least twice per year seems imperative given the current environment.
All our incarnations of Emotional Intensity are rapidly climbing towards optimistic extremes or are already there. The most reliable is the 21-day indicator, seen at left. However, the bull phase that commenced in March 2003 was marked by a protracted period (see circled area) in which overt optimism did not produce corrections of any significance, a good lesson not to place too much reliance on any one indicator. In the May 24th issue, we showed the indicator, commenting on the buy signal registered when our line crossed back above the bottom horizontal line denoting overt pessimism. Although that signal is too old to remain valid, no sell signal has yet been generated. The line must first cross above the top horizontal line denoting overt optimism and then cross below. Since we are not publishing again until July 19th, we will make every effort to at least issue a Special Update to subscribers if and when a signal occurs.
