More on stock market exhuberence

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Fromm FTAlphaville overnight comes technical analysis of the S&P valuation stretch from GaveKal:

On Thursday the [S&P 500] index hit an intraday high, followed by sharp selling pressure, perhaps as strong data gave way to renewed “taper” fears. Yet by Friday investors were back in there “buying the dip.”

Although Thursday’s intra-high was not retaken, the S&P closed the week higher for the fifth week in row, up 0.5% to 1770.61. From a purely technical standpoint, this price action provides us a formal sign that tougher times are ahead for equity markets.

…Investor sentiment surveys have risen significantly in recent weeks and reached levels of bullishness at which corrections occurred during the last decade. Various measures in the options market indicate that investors do not want to protect their exposure. Implied volatility went too low too fast. Finally, on Friday, investors erased most of the negative action observed on the previous day, a sign of overconfidence…

  • A higher-frequency proxy of equity withdrawal, driven by the sum of announced share buybacks and LBOs minus equity offerings, suggests that equity issuance turned a lot less supportive for equity markets in Q2 relative to Q1 and worsened even further in Q3.
  • This is both because of a slowing in announced share buybacks but also an increase in IPO/secondary offering activity in Q2/Q3.
  • For the year as a whole, there appears to have been no improvement in corporate equity withdrawal activity vs. 2012.
  • This means that this year’s Great Rotation trade has been driven more by the swing of retail flows than corporates themselves.
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…The gap between Equity minus Rate spec positions appears to be very high by historical standards. To see this we construct the difference between the sum of CFTC net spec positions in US equity futures, scaled by open interest and a duration-weighted aggregate of US rate futures, also in USDs and scaled by open interest. This enables us to go back much further and show a time series since 1993 (Figure 13). Based on this, Equity minus Rate spec positions are at extremes, the highest since the early 2000s.

Cyclical turning point, bubble, or both?

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.