Market Stuck Near All-Time Highs

Just a short note this week so that I can catch up on my “Turkey Induced Coma.”

Despite three consecutive Monday announcements of “potential vaccines,” an agreement by President Trump to allow the “Biden Transition” to begin, and a holiday-shortened trading week that left the “inmates in charge of the asylum,” the market hasn’t done much with it. As of Friday, the market is only about 1.62% higher than it was three months ago.

Unfortunately, as we will discuss in more detail momentarily, the surge in November, one of the largest monthly advances in history, consumed the entirety of the market’s oversold condition that existed before the election.

Furthermore, you have to wonder precisely how much “gas is left in the tank” when even “perma-bears” are now bullish.

Consequently, you will notice the previous peaks in perma-bull exuberance have coincided with short-term corrections.

Therefore, the question we should ask is “if everyone is in, who is left to buy?”

A Lack Of Buyers

As I have noted previously, one of the primary drivers, unsurprisingly, is the extremely easy “financial conditions” caused by low-interest rates, fiscal and monetary policies. Consequently, easy financial conditions have historically also come with a “price tag” attached. (Chart courtesy of Tavi Costa of Crescat Capital)

Furthermore, investors’ extreme bullishness, particularly post-election, has dragged buyers into the market. As David Larew of ThinkTankCharts notes, the National Associate Of Investment Managers is carrying above 100% exposure to stocks (leverage). Such levels of ownership have previously coincided with short- to intermediate-term corrections in the market.

Correspondingly, the surge in buying has also pushed investors to give up hedging portfolios by buying “put options.” With the Put/Call ratio back to more extreme conditions, market corrections have generally been close by.

Deviations Are Extreme

Lastly, the market’s monthly deviations from the 3-year moving average are pushing well into 3-standard deviation territory and trading more the 30% above its mean. Such deviations, as shown, have historically not worked out well for buyers.

The critical ingredient of a bullish advance is “confidence.”

Nothing Can Stop It?

The current consensus is with a vaccine coming and more stimulus, a surge in economic recovery will occur.

“When all experts agree, something else tends to happen.” – Bob Farrell

Previously, I discussed why it doesn’t take much of a catalyst to start a bout of “panic selling.” We quoted Doug Kass on a list of potential risks which few seem to be considering:

• The virus mutates, rendering “vaccines” ineffective. 
• There are unexpected manufacturing, distribution, and storage problems with delivering a Covid-19 virus.
• With a delay and without a timely vaccine, the spread of Covid-19 intensifies.
• As Covid spreads over the next month, there is an increase of state lockdowns, business, school closings, “stay at home orders,” and curfews enacted around the country.
• The debated election results linger into 2021 as lawsuits multiply.
• Global economic growth fails to reaccelerate in the second quarter of 2021.
• Housing falls under the weight of higher home prices – affordability suffers. Housing’s economic multiplier effect moves into reverse.
• Consumer and business confidence takes a downturn.
• Bond spreads widen.
• A divided and partisan House fails to deliver a sizeable and credible stimulus bill.
• Investors realize that monetary policy can no longer foster or catalyze economic growth.
• Deflationary conditions accelerate based on unexpected economic weakness.
• A sizeable corporate fraud gets discovered – further deflating investor confidence.

In a market where investors are throwing money into “SPAC’s,” or shell companies that will try and find something to invest in, the potential for a massive corporate fraud to develop is not that far “out of the box.” 

Furthermore, when everyone is long equities and leveraged, it is an unexpected, exogenous event, which begins the rush for the exit.

Such is why you don’t wait for it to start raining to “build the ark.”