Thursday, November 6, 2014

Ladies & Gents, may I present the Bear Case?

To be clear, this is specifically regarding the US stock market. I do not think that the Singapore stock market is over-valued, but I think that if the US markets go down, so does most of the world.

While many people have been cheering the US Stock market higher, along with the rest of the stock markets around the world, I do not believe that much further upside is present at that point of time.

My first few points will be from Peter Tenebrarum from The Acting Man.

1) II Bullish Percentage had the largest 2 week change in 20 years
2) Bearish Percentage is a mere 15.1%
3) Bearish Percentage at the bottom of the October correction was only 17.3%
4) Rydex money market assets at levels last seen in the late 1990s
5) Rydex bear assets are lower than at the 2000 peak
6) Rydex bull/bear ratio at historical high 
7) NAAIM exposure is diverging
8) St. Louis Fed SFI showing high complacency
9) Mutual Fund Cash Level at historical low cash levels
10) NYSE Margin Debt seems to have topped out
11) NYSE Investor Credit is at historical negative levels

My next points will be from John Hampton from Solarcycles.

12) Gap-up exhaustion similar to 2000 peak
13) JNK making lower highs
14) XLY:XLU ratio making lower highs
15) Spike and divergence of bullish percent put/call ratios similar to 2011 year end decline
16) V-bottoms occurring ever 2.2 months instead of the historical frequency of every 1.6 years

My last points will be from Doug Short.

17) Market cap to GDP at +2SD, only surpassed by dotcom bubble
18) Wilshire 5000 to GDP at +2SD, only surpassed by dotcom bubble
19) Real S&P Composite is 82% above the regression
20) Shiller PE10 is 32% above the regression (20% of the time at these high valuations)
21) Q-ratio, arithmetic change and geometric change only surpassed by dotcom bubble
22) Average of 4 valuation methods going back 100 years show only 1929 and 2000 as being higher

I must admit that the bull case is equally strong though:
1) Money printing
2) Irrational investors
3) And, the trend is your friend?

Until it isn't, of course. What more do you need for the bull case other than, "Hey, it's going up!"?

I wish I could say that this is the market top and we're only heading down from here, but I can't. The short-term movement of the markets can be caused by anything. We could definitely go up from here, it is a possibility. But is it very probable? I don't think so. Are we now at a fair price? Well, you decide for yourself. Or better yet, you just wait and see what the market decides.

Although I have made my bearish case, I must concede that many of these indicators may not be the best and most accurate ones. However, I do think that cross-referencing and finding many different independent data that points to the same conclusion does make for quite a compelling case.

But then again, money printing and irrational investors. How do you beat that?


  1. Tell you true story in those days when I was active in investment forum.

    Once there were two veterans with many years experience over market cycles congratulating themselves in Mar 2009 for staying in cash , one 90% and the other one 100% as they believe in News and Gurus that STI would fall to 1,200.

    1. Hi Uncle CW8888,

      Are they still in cash? Haha, I hope not!

      I don't think it's wrong to wait for even more margin of safety back in Mar 09 when things were so uncertain, but the investor must realize that they are giving up opportunities by waiting in cash.

      For long long horizon investors, if stock is trading below "fair value", then it is just how much safety they want or how greedy they are, because actually can buy at least some already!

  2. i believe we are looking at a case of risk 40% to make 5% kinda market!

    1. Hi Ladykiller,

      I think you are right, risk-reward looks very skewed now! For retail investors with no mandate and quarterly KPI, I think there is no need to assume such risk at this moment.

  3. Ha! Ha!
    For traders, they are aiming the other way round.

    March 2009 was when i capitulated (No more balls though still plenty of bullets in relative terms of capital)

    1. Hi temperament,

      I know quite a few people think that this break above 2000 and 2007 highs will be the start of a secular bull markets (similar to breakout at early 1980s), but valuations are keeping me skeptical!

      Capitulated and sold off positions and held off buying, or capitulated and went all-in? Capitulation depends if you're a bear or bull, haha!


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