Is It Really “Too Late to Be Bullish”?

Posted On Jun 21, 2019 By Dave Gonigam

  • Bearish headlines do not mean the end of the bull market is nigh
  • In fact, they might be the fuel for the next big rally — read on
  • Did Tucker Carlson prevent U.S. airstrikes against Iran last night?
  • How Trump’s “I’m in no hurry” stance reminds us of Obama in 2013
  • The back story behind Australia’s $2.3 billion currency boo-boo
  • Two reasons gold’s rally might be capped soon… and why we like one gold ETF despite its high expense ratio.

“‘It’s Too Late to Be Bullish’: Record Stock Run Is Drawing Worriers,” says a Bloomberg headline picked up this morning by Drudge.

As we anticipated yesterday, the S&P 500 notched a record by the closing bell. The broad market is set for its best first half of the year since 1997.

But Société Générale strategist Sophie Huynh believes it won’t get much better than this: “It’s too late to be bullish,” she tells Bloomberg. “The Fed starts to consider rate cuts, equities should start to reflect slower growth momentum and investors should start to cut earnings expectations. But that hasn’t impacted equities yet.”

To her mind, valuations are stretched and the fundamentals are deteriorating. “At this stage of the economic cycle, you’re either going to have a recession next year or a cyclical slowdown,” she says. And she’s hardly alone…

The problem is that you could have said all of this anytime in the last 18 months and been correct.

Around here we’ve been pointing out the whole time we’re in the late boom phase of the boom-bust cycle. The beginning of the end, as it were.

So where are we now? Is this the end of the end? Or at least the middle?

“The bulls are nowhere to be found,” says our chart hound Greg Guenthner. “In fact, many investors are cashing out and prepping for another market meltdown.

“Equity allocations experienced the second-biggest drop on record while investors loaded up on cash by the most since 2011, according to a new Bank of America Merrill Lynch money manager survey, via Bloomberg. Trade war jitters and fears of an impending recession contributed to the bearish sentiment, Bank of America notes.”

The bears also show up in force in the well-regarded sentiment survey from the American Association of Individual Investors. Bullish sentiment shows up in the squiggly blue line on this chart. It’s jumped in recent days… but it’s still 10% lower than it was at the time of the stock market’s last record high in early May…

AAII Chart

“It is very rare to see bullish sentiment this low given the market’s current state,” says an analysis from Bespoke Investment Group.

More than once in the last 10 years, our analysts have said we’re experiencing “the most hated bull market in history.”

That is, the stock market keeps roaring higher — see the red line on that chart above — but large numbers of investors don’t believe it’s for real. They keep waiting for the bottom to fall out… and it never does. That’s the way of most bull markets.

The way they end is that the ol’ FOMO — fear of missing out — becomes too much and investors finally jump in. All that buying pushes the market to stratospheric heights… and the sentiment goes euphoric. A conceit takes hold that bear markets have been abolished and it’s all rainbows, all the time, till the end of time.

That’s when the bottom drops out.

And we’re just not there. Not when the sentiment surveys are this weak and Bloomberg has headlines about how it’s too late to be bullish. We said the same thing a different way last month.

What’s more, the sheer odds point to the market going higher from here.

Our resident “quant” Jonas Elmerraji directs us to research by Yale professor William Goetzmann. “He showed that booms are rarely followed by busts,” Jonas explains. “His study of 42 different stock markets from 1900–2014 actually found that booms are much more likely to be followed by more booms.

“In fact, a stock market that’s doubled in the past year is almost twice as likely to double again as it is to get cut in half in the year that follows.”

NBER Chart

Yes, that’s totally counterintuitive. “If you picked 10 investors off the street,” says Jonas, “and asked them whether they’d be willing to buy a stock after it had just doubled, most would think you were nuts for even asking the question.”

But the numbers are the numbers. They’re not a guarantee of a stock market “melt-up” from here… but they should give you pause when you see all those “the end is nigh” headlines.

As for today’s market action, the major U.S. indexes are treading water. The S&P is ruler-flat at 2,954.

Treasury yields are backing up, the 10-year once again above the 2% level. Gold is edging ever closer to $1,400, the bid now $1,391. A close for the week anywhere north of $1,380 is a very good sign.

Crude is at $57.42 — the highest in nearly six weeks. It would be much higher absent the president calling off the dogs of war at the last minute…

“For once I am glad Trump watches Fox News,” says a wag on Reddit.

As you’ve likely heard, the president ordered an attack on Iran to avenge the honor of the robot aircraft downed by Tehran’s military over the Strait of Hormuz… and then gave the order to stand down.

Our acquaintance Scott Horton — tireless radio and podcast host, among many hats he wears — says he got a tip at 8:00 p.m. EDT that the airstrikes would commence in an hour. 8:00 p.m. EDT happens to be when Tucker Carlson’s Fox News show comes on.

As we mentioned yesterday, Carlson has recently urged Trump in private conversations not to attack Iran. Carlson’s featured guest last night was retired Army Col. Douglas Macgregor — another skeptic of attacking Iran. (Last month we told you how Macgregor thinks Russia is likely to step into such a conflict — yikes.)

Cause and effect? As Fox used to say, we report, you decide.

And as another wag on Reddit said, imagine if Bill O’Reilly still had Tucker’s time slot. Heh…

This morning, the president said on Twitter, “I am in no hurry” to attack the regime in Tehran — which bears an uncanny resemblance to a turning point during the Obama administration.

On Aug. 21, 2013, a sarin gas attack near the Syrian capital Damascus killed hundreds. The global elite immediately pinned the blame on the Assad regime. A year earlier, Obama had said if Assad were to use chemical weapons, that would cross a “red line for us.”

But the evidence Assad did it was shaky at best. The intrepid reporter Seymour Hersh, of My Lai and Abu Ghraib fame, uncovered compelling evidence that traced the sarin back to Turkish intelligence, which acted in concert with jihadis linked to al-Qaida. Both Turkey and al-Qaida stood to gain if Western powers toppled Assad.

The truth mattered little to the global elites’ narrative. On Aug. 30, nine days after the attack, Secretary of State John Kerry declared, no fewer than 35 times, that “we know” the Assad regime was responsible.

Then a funny thing happened the next day, Aug. 31. Obama had had a long talk with Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff. Seems the military was suspicious about the quality of the intel… and leery about the endgame of Syrian regime change.

Obama strode before the cameras and said, “The chairman has indicated to me that our capacity to execute this mission is not time-sensitive; it will be effective tomorrow, or next week or one month from now.”

Sounds a lot like “I am in no hurry.” Now as then, we’re told it’s the uniformed military that was most resistant to launching an attack — in contrast to the terrible troika of National Security Adviser John Bolton, Secretary of State Mike Pompeo and CIA Director “Bloody” Gina Haspel.

Another day, another bum economic number for the month of June.

Today it’s the “PMI composite flash” — which you might say previews the much-followed ISM Manufacturing Index that comes out the first of the following month. Numbers above 50 indicate growth; below 50, contraction.

The composite number is 50.6 — a three-year low. The manufacturing component is 50.1 — a 10-year low.

We caution that below-50 numbers do not signal imminent meltdown or even mild recession. But they’re worth watching. In any event, there’s nothing here to dissuade the Federal Reserve from cutting interest rates at its next meeting July 31.

And now a 5 follow-up to our item last month about the flub on Australia’s new $50 bank notes.

The word “responsibility” was misspelled in tiny font taken from a speech by Edith Cowan, the first female member of a legislature Down Under. The error wound up on $2.3 billion worth of currency… and went undetected for seven months.

Now two of Australia’s major newspapers have gotten their hands on documents that explain what went awry.

XRayTweet

It was a lack of copy-paste capability.

For real. It’s right there in a report from the Reserve Bank of Australia’s printing unit, dated Jan. 11 this year: “The graphical software package used by [the printing office] has no copy-paste mechanism and no spelling or grammar check. The text was manually typed in and misspelled at this point.”

An email from a manager, also obtained by the newspapers, tried to comfort staff — “No one died,” it said.

Close enough for government work, right?

“Dave, the Fed’s latest jawboning has indeed ignited most asset classes — and I sincerely hope this will be gold’s big liftoff,” writes one of our regulars after yesterday’s 5.

“Hopefully it will bust through the ceiling it has been hitting for five long years.

“As Jim Rickards has been warning us, however, gold seems to be pegged to the IMF’s world money: the special drawing right. The evidence suggests that China’s State Administration of Foreign Exchange (its secret sovereign wealth fund) is the driving force behind this.

“You first brought this to our attention last July. It’s all about de-dollarization as the ‘axis of gold’ nations (including China, Russia, Iran and Turkey) suppress the price of gold in order to acquire more of it on the cheap. While they can’t keep gold down indefinitely, it’s doubtful gold’s price will break out — at least in dollar terms — until their stockpiles reach critical mass.

“So the weird futures smash-downs at 0-dark-30 may continue for a while longer. Just a working theory…”

The 5: Can’t rule it out. Another factor that could keep a lid on gold is something else Jim has cited in the past — the “dollar shortage.” It’s still a thing, even if we haven’t said much about it lately.

“How can you suggest the OUNZ gold ETF when it has a 0.49% expense ratio but you can buy the same thing in IAU with a 0.10% expense ratio?” reads another reply to yesterday’s gold discussion. “Certainly a disservice to your readers.

“I bought IAU and GDX last week ahead of the Fed meeting just in case they lowered rates. Apparently just talking about it is enough. GDX is up 7.01% since last Friday and IAU up 3.1% in the same time period. I will buy more every time the Fed announces they are lowering rates.

“Love it when a plan comes together.”

The 5: Per Morningstar, the gap isn’t quite as extreme as you portray — OUNZ’s expense ratio is 0.4%, while IAU is 0.25%.

We like lower expenses on ETFs as much as anyone, but when it comes to bullion ETFs we also like having confidence that the fund manager possesses physical ounces of metal in a vault to back up the shareholders’ paper ounces in their brokerage accounts.

No slight against iShares, but in this regard we just have more confidence in VanEck — we’re talking about the company that created the first gold-miner mutual fund in 1968, when it was still illegal for Americans to own the metal!

Have a good weekend,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. In case you missed it earlier today… our penny stock guru Tim Sykes wants to draw your attention to an opportunity that came online just yesterday. It’s been racking up thousands of views.

“Those lucky enough to respond in time,” he said, “will see how this could impact their bank account in a big way. Week after week.”

Tim urges you to drop whatever you’re doing and watch this brief clip while it’s still available. He says it’s available only through midnight tonight. Follow this link for immediate access.


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