The collision of global markets and social mood

Thursday, August 21, 2014

Why The Latest Narrative Is Likely Wrong

Here we are at all-time highs, and the narrative-of-the-day is about money on the sidelines. $10.8 trillion of it.

That's the figure being cited in a Marketwatch story this morning which seems to provide investors yet another hook to rationalize valuations that now rival those of 1929, 1937, 2000, and far exceed those of 2007.

This is a perfect example of linear trend extrapolation due to the reliance on exogenous causality rather than social mood to predict markets. (An excellent explanation can be found here: The Fallacies of Trend Extrapolation and Reliance Upon Exogenous Causality, courtesy of the Socionomics Institute.)

The inferred hook is cash on the sidelines.

Social mood causality would explain why such hooks appear now: because the majority is bullish at highs and project that bullishness into the future.

If higher prices are indeed coming, internals suggest we should be on the lookout for investors and traders taking their money off the table -- putting even more cash on the sidelines, to run with the article's theme.

For the second day in a row, the new 52-week high-low difference on the S&P was below 40, compared to 184 back in 2013, the record since the 2009 lows.

During the most recent correction to 1904.78, there were just 8.8% of the S&P above the 10 day moving average. Yesterday closed at 94.2%. Above 80% is where corrections usually start from -- when everything looks great.

Yesterday there were more declining stocks on the NYSE than advancing stocks. That means breadth sucks. At highs.

This chart telegraphed the correction and the rally months ahead (it was also wrong for a long while, too). But the point is, where do you think cash on the sidelines is best used?

Not shown is a 61.8% Fibonacci extension target at 2014.18. There are higher targets, too. But the way the S&P is acting of late, with volume expansion on down days and weak internals on up days, it doesn't feel prudent to hope for them.

Today I will be trying SPY 199 puts against what is left of my SPXL position. The Fed's Jackson Hole meeting is today through Saturday. The new moon is Monday. I will give myself some room to be wrong a few times with the puts.

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