Long Term Stock Market Sentiment Remains as Lopsided as Ever 



Investors are Oblivious to the Market’s Downside Potential

This is a brief update on a number of sentiment/positioning indicators we have frequently discussed in these pages in the past. In this missive our focus is exclusively on indicators that are of medium to long-term relevance to prospective stock market returns. Such indicators are not really useful for the purpose of market timing –  instead they are telling us something about the likely duration and severity of the bust that will follow on the heels of the current market mania. The first chart is an update of the current situation in RYDEX funds. Despite their small size, these funds have always represented a quite accurate microcosm of general market sentiment.

A RYDEX overview: RYDEX money market fund assets have recently declined to new all time lows; the pure non-leveraged bull-bear fund ratio is back above 29 (i.e., bull funds assets are more then 29 times larger than bear fund assets). At the top of the tech mania in early March 2000, this ratio peaked at roughly 17. Lastly, the amount of assets in RYDEX bear funds demonstrates that bears remain extremely discouraged. It is fair to say that at this stage almost no-one expects that the market could suffer a serious slump.

The next chart shows the leveraged RYDEX bull-bear ratio. Although it is well off its 2018 peaks, it remains in nosebleed territory at a factor of 16.4.

The leveraged RYDEX bull-bear ratio compares assets in leveraged bull and bear funds and is testament to the intensity of speculation on a rising market. Its all time low was made in June 2003 at 0.20; in November of 2008 it bottomed at 0.40. Both were quite propitious times to go long equities – the same can probably not be said of the current juncture.

The next chart is a very long term chart of the mutual fund cash-to-assets ratio. In late December 2018 it fell to a new all time low of 2.9 (i.e., a mere 2.9% of all mutual fund assets were held in cash). In short, not even a rapid and harrowing 20% correction was able to faze fund managers. This shows how deeply ingrained the bullish consensus has become.

Mutual fund cash is at an all time low compared to total mutual fund assets. This ratio obviously has primarily long term implications; prior to the beginning of the secular bull market, it frequently reached double-digit territory. The extremely low levels that could be observed since 2005 are historically unprecedented. In part this can be attributed to low interest rates, but the main reason is simply that everyone has become convinced that the central bank will always be able and willing to rescue the market when it falters. This is a dangerous attitude.

The next chart shows the ratio of assets held in retail money market funds to the market capitalization of the S&P 500 Index. This chart is very similar …read more

Source:: Acting Man