The Week Ahead: The Bubble No One Is Discussing

May 08, 2016 | May 2016 Bond Updates

The initial reaction to the weak jobs report Friday caused further selling in early trading Friday. Investors apparently were more concerned about the weakness in the economy than the prospects that the Fed will not raise rates soon. Based on the Fed fund futures the odds for a hike in June are at 13%, 30% in July and only 42% in September. The trading for the first week of May has caused a further drop in bullish sentiment as according to AAII only 22.3% are now bullish which is down 5% from the previous week. This is the lowest reading since the 19.24% reading from February 12 which was one day after the market's low. This low bullish reading then corresponded with the key technical readings (Is There Blood In The Streets Yet?) that indicated the stock market was finally bottoming. Investors should also remember that the January 15th 2016 reading of 17.9% was the lowest since 2005 and was much lower than any reading during the 2008 bear market. This sentiment data is best used as a contrary indicator which means that a high level of bullishness is a potentially negative for the stock market while a low reading can be positive if it lines up with the technical readings. Typically the bullish% has been quite high at past major market tops and the average bullish reading of individual investors from November 1999 through April 2000 was over 52%. This included a peak reading of 75% in early 2000 as the Nasdaq Composite was making its high. At the bull market high in October 2007 the bullish% peaked at 54.6%. Since the start of the current bull market in 2009 the highest reading has been 63.3% in December 2010. The highest reading in 2015 was 51.7% but it only barely made it above 40% late in the year. Though the current reading does not mean the market cannot decline it is not consistent with a major top as many of the weak longs have already been sold. The bearish sentiment is still quite low at 30.3% as it was much higher at 48.7% at the January and February lows. The high 47.3% neutral reading would need to typically drop before the reading would be consistent with a correction low. WA5-6a The financial press was focused last week on the Sohn Conference which raises money for pediatric cancer. At the conference many of the best-known hedge fund managers share their investment ideas to conference attendees and the often conduct extensive interviews. The long-term chart of the performance for various hedge fund strategies from Bloomberg shows that "all of them have weathered the same steady decline in rolling ten-year returns since 1999."

View more at: http://www.forbes.com/sites/tomaspray/2016/05/07/the-week-ahead-the-bubble-no-one-is-discussing/