HOW HIGH IS THE “WALL OF WORRY”?

13 December 2010 by TPC 2 Comments

It’s been a while since I reviewed the “Wall of Worry” indicator (see here for more info) so now is as appropriate a time as ever.? Although the market rally has continued in 2010 we continue to see a great deal of skepticism in markets.? This indicator takes the inverse summation of a broad set of LONG-TERM indicators that track consumer sentiment, business sentiment and investor sentiment. This is vastly different than many of the short-term indicators I often discuss – most of which are pointing to severe excessive bullishness right now (see here & here).

As you can see in the chart below the “wall of worry” has peaked at levels over 90 in accordance with major long-term market bottoms.? In March of 2009 it peaked at 93.5 and in June 2010 it actually surged back near those levels with a reading of 92.13.? Although the equity markets have rallied over 80% the skepticism of a real economic recovery and sustainable market rally has remained extremely high.

As of Friday’s close the “wall of worry” is at 84.33.? This is just shy of the highs and well off levels that are consistent with euphoria.? During the tech boom when complacency was extraordinarily high the indicator bottomed in the high 40′s.? During the less euphoric housing boom the indicator bottomed at 65.? Either way, it’s safe to say we’re well off those levels.? Based on this metric it’s clear that the “wall of worry” remains quite high and that could be a long-term positive for the equity markets.

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Market Meets New Wall of Worry Or More Likely Just Brief Profit-Taking On Way To Higher Highs

Stocks pulled back after a big advance and that can be good for bull markets

Most of the bricks in the previous wall of worry have been removed.?Economic reports have continued to improve over recent weeks; in manufacturing, the service sector, retail sales, durable goods orders, and even in the employment picture, where 151,000 new jobs were created in October, more than double the 70,000 that economists expected.

The uncertainty over the Federal Reserve’s QE2 decision has been resolved with the Fed adding to the stimulating atmosphere, providing another round of quantitative easing in spite of the already improving economy.

The major U.S. market indexes, including the Dow, S&P 500, and Nasdaq rallied back to, and then above the potential resistance at their April peaks, before pulling back some this week.

Investors have become even more bullish and optimistic. This week’s poll of its members by the American Association of Individual Investors showed 57.6% bullish, the highest level in almost four years.

The good news apparently also reached Main Street. On Friday morning it was reported that the Thomson Reuters/University of Michigan’s Consumer Sentiment Index improved to 69.3 in early November (its highest level in five months) from 67.7 in October.

So what has been wrong with global markets this week?

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The U.S. market closed down roughly 2.5% for the week. Emerging markets, which many analysts projected would benefit the most from inflows of additional liquidity provided by the Fed’s decision, were down the most. Brazil, India, South Korea, closed down two to three percent for the week, while China closed down a big 5.5%. Meanwhile, Japan, a large developed country, which was not supposed to fare as well as emerging country markets, closed up 1.0% for the week.

A bet against emerging markets via the ProShares UltraShort Emerging Markets ETF, symbol EEV (designed to move up when emerging markets move down, and leveraged two to one) closed up almost 9.0% for the week.

Was it just that markets had become short-term overbought and ran into a brief bout of profit-taking, particularly since this was the week before the month’s options expirations week, and the week before tends to be negative?

If so, markets are likely to be back up next week since the decline this week took care of the short-term overbought condition, and next week is the week of the expirations, which tend to be positive.

Or was the decline the beginning of something more serious?

The market does seem to have a new wall of worry just a week after concerns about the economic recovery, and whether the Fed would or would not provide additional quantitative easing, faded away.

The bricks in the new wall of worry include:

• Concerns that the Fed’s additional stimulus may cause new problems rather than help the economy by encouraging home purchases or providing new jobs.
• Worries that commodity prices had spiked up into bubbles which may burst, a worry that struck Friday with the big $40 an ounce (3%) plunge in the price of gold, and equally large declines in the price of oil and other important commodities.
• Apprehensions about the activities of the Chinese government, including talk that it might hike interest rates to dramatically slow its globally important economy and ward off threatening excessive inflation in China.
• Anxiety about a potential currency or trade war if the decline in the U.S. dollar continues.

Via technical analysis there is also the U.S. market’s intermediate-term overbought condition above 20-week moving averages, and the high level of investor bullishness (which is at levels of complacency often seen at market tops).

The uncertainties have even extended to U.S. Treasury bonds, which investors have piled into as a perceived safe haven over the last two years. The safe haven over the last two months has actually been a bet against U.S. Treasury bonds. For instance, the ‘inverse’ ProShares Short 20-year bond etf, symbol TBF, designed to move up when bonds move down, has gained 11% since early September, while bonds have declined 11%.

There’s no doubt about it. We are still in a very fluid economic and investing period, not a time for investors to become so complacent as the investor sentiment readings seem to indicate, that they fall asleep at the switch.

(In the interest of full disclosure, we have positions in the U.S. market, the Japanese market, gold, and the ‘inverse’ bond ETF TBF, in our portfolio, at least at the moment).

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Market Meets New Wall of Worry Or More Likely Just Brief Profit-Taking On Way To Higher Highs

Stocks pulled back after a big advance and that can be good for bull markets

Most of the bricks in the previous wall of worry have been removed.?Economic reports have continued to improve over recent weeks; in manufacturing, the service sector, retail sales, durable goods orders, and even in the employment picture, where 151,000 new jobs were created in October, more than double the 70,000 that economists expected.

The uncertainty over the Federal Reserve’s QE2 decision has been resolved with the Fed adding to the stimulating atmosphere, providing another round of quantitative easing in spite of the already improving economy.

The major U.S. market indexes, including the Dow, S&P 500, and Nasdaq rallied back to, and then above the potential resistance at their April peaks, before pulling back some this week.

Investors have become even more bullish and optimistic. This week’s poll of its members by the American Association of Individual Investors showed 57.6% bullish, the highest level in almost four years.

The good news apparently also reached Main Street. On Friday morning it was reported that the Thomson Reuters/University of Michigan’s Consumer Sentiment Index improved to 69.3 in early November (its highest level in five months) from 67.7 in October.

So what has been wrong with global markets this week?

Special Offer: Jim Oberweis bought Baidu at $7.90, earning readers huge profits.? Click here for more recommended stocks in the?Oberweis Report.

The U.S. market closed down roughly 2.5% for the week. Emerging markets, which many analysts projected would benefit the most from inflows of additional liquidity provided by the Fed’s decision, were down the most. Brazil, India, South Korea, closed down two to three percent for the week, while China closed down a big 5.5%. Meanwhile, Japan, a large developed country, which was not supposed to fare as well as emerging country markets, closed up 1.0% for the week.

A bet against emerging markets via the ProShares UltraShort Emerging Markets ETF, symbol EEV (designed to move up when emerging markets move down, and leveraged two to one) closed up almost 9.0% for the week.

Was it just that markets had become short-term overbought and ran into a brief bout of profit-taking, particularly since this was the week before the month’s options expirations week, and the week before tends to be negative?

If so, markets are likely to be back up next week since the decline this week took care of the short-term overbought condition, and next week is the week of the expirations, which tend to be positive.

Or was the decline the beginning of something more serious?

The market does seem to have a new wall of worry just a week after concerns about the economic recovery, and whether the Fed would or would not provide additional quantitative easing, faded away.

The bricks in the new wall of worry include:

• Concerns that the Fed’s additional stimulus may cause new problems rather than help the economy by encouraging home purchases or providing new jobs.
• Worries that commodity prices had spiked up into bubbles which may burst, a worry that struck Friday with the big $40 an ounce (3%) plunge in the price of gold, and equally large declines in the price of oil and other important commodities.
• Apprehensions about the activities of the Chinese government, including talk that it might hike interest rates to dramatically slow its globally important economy and ward off threatening excessive inflation in China.
• Anxiety about a potential currency or trade war if the decline in the U.S. dollar continues.

Via technical analysis there is also the U.S. market’s intermediate-term overbought condition above 20-week moving averages, and the high level of investor bullishness (which is at levels of complacency often seen at market tops).

The uncertainties have even extended to U.S. Treasury bonds, which investors have piled into as a perceived safe haven over the last two years. The safe haven over the last two months has actually been a bet against U.S. Treasury bonds. For instance, the ‘inverse’ ProShares Short 20-year bond etf, symbol TBF, designed to move up when bonds move down, has gained 11% since early September, while bonds have declined 11%.

There’s no doubt about it. We are still in a very fluid economic and investing period, not a time for investors to become so complacent as the investor sentiment readings seem to indicate, that they fall asleep at the switch.

(In the interest of full disclosure, we have positions in the U.S. market, the Japanese market, gold, and the ‘inverse’ bond ETF TBF, in our portfolio, at least at the moment).

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FUD 2 REFLECTION: WHAT ME WORRY?

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Par Annaly Capital Management

C'est l'age d'or de surveillances Fed. Et nous avons fait notre juste part.Un jour où nous devons discours de 5 Fed présidents et 1 gouverneur, ce qui est plus là pour dire que n'a pas déjà été dit ?

La foi en la Fed est élevée, et marché des capitaux ICS (peur, l'incertitude et incertaine) semble être faible. Nous avons enfin écrit sur ICS en juillet de 2009, comme les marchés étaient inquiétants sur le déroulement des installations de soutien d'urgence de Fed. Comme il s'est avéré, atout achète par Bernanke et ses collaborateurs s'est avéré pour être un outil très efficace pour calmer les investisseurs.Rétrospectivement, il doit avoir été rassurant que les investisseurs ont été préoccupés par rien du tout.Avance rapide jusqu'à aujourd'hui, et que la réalité d'un autre cycle de QE a devenir cuite dans le gateau, ce à quoi nous assistons est :

1. Forte corrélation

2. Faible volatilité

3. Chute volume

Le tableau suivant montre la corrélation de roulement 2 mois entre l'indice S & P 500 et de l'indice de dollar américain (-0.92), ainsi qu'entre le S & P et le prix au comptant or (0,92).Si vous étiez suffisamment forés à prendre de la valeur absolue de chacune de ces deux corrélations et leur somme, vous verriez que cette métrique serait niveau le plus élevé d'au moins les 3 dernières années (mais qui serait que wonkish?).

Le tableau suivant montre les deux indices de volatilité des marchés, le déménagement et le VIX.Les mesures d'index VIX devraient volatilité des prix futur sur le marché de l'équité, tandis que l'index MOVE est la mesure de la volatilité correspondante pour le marché des titres à revenu fixe.En bref, les attentes en matière de volatilité future sont très faibles comparativement au cours des dernières années.

Enfin, le volume a été sur le déclin. Depuis le fond de marché de l'équité en mars de 2009, les 60 jours se dépla?ant moyenne du volume sur le NYSE est environ 30 %, encore plus par rapport aux niveaux de 2006 et 2007.

Si nous devions créer un index ICS pour les marchés de capitaux, il semble être en très faibles quantités. Il est inquiétant qu'apparemment quelques investisseurs sont inquiets, mais qui pourrait changer à tout moment.

Espèce : nous n'étions pas encore pu terminer cette pièce avant PIMCO, Blackrock et la Réserve fédérale de New York a annoncé son intention d'aller après la Bank of America sur les pertes de l'hypothèque et toutes les mesures ci-dessus inverser le cours : le marché des actions vendues significativement, les liaisons se ralliés, or a chuté de près de 40 $, le VIX enrichis et volume de marché des capitaux a décollé.

C'est peut-être là une complaisance fragile.

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