A 'dearth of opportunities' - actually is behind both the risk and complacency of the current market environment. A lack of 'value' in equity or credit markets, ironically has contributed to the upside price behavior; as risk-averse investors have essentially been compelled to shuffle around seeking a place to park their money, even if they're fairly content (what choice to they have) with low yields.
Note in this chart of the Russell 2000 the comparatively mediocre bounce that contrasts with the behavior of the S&P 500. We've explained the reasons, and why the RUT best represents the nature of the rebound after the March top for most momentum stocks (partially offset by actions in one stock; Apple, which I discussed at-length this week, and we've been bullish on since sub-400).
(Noted conditions) create an 'excess'; both in price levels and complacency. It's because an advance in the market based primarily on 'lack of alternatives', and having little or nothing to do with enthusiasm for the 'business' of the securities invested in, is a market at-risk of trouble. In a sense; the downside exposure if we get a substantial break could have investors at these levels licking wounds, as they subsequently contemplate what they were thinking when buying highs.
Is a 'seminal shift' pending - for market psychology? We think so. Investors have been prioritizing 'yield chasing', while foreign 'capital flight' has vindicated overstaying longs for awhile now. Plus you have 'some' month-end activity too. Investors who are emphasizing return 'on', rather than 'of', capital; debate lots of issues; think they're saving but are potentially in for an unsettling period.
By prioritizing 'risk' over safety; the compulsion to invest (most of which hasn't been done overtly by individuals but by their fund or account managers) looks fine to most investors 'for now'.
Remember the comments about 'buybacks' and 'splits' and IPO frenzies early this year? Lots of earnings 'appeared' to be better than they organically were; and now we're going to add 'margin leverage' (which remains near record high levels) contributed to this as well. To that let's add the concern we noted once before, which is the 'leveraged ETF's impact' on the market. That may explain both the upside scramble (further details and future impact is discussed).
There are lots of hard challenges ahead; and this time, there must be sobriety in geopolitics & fiscal policies; beyond monetary shell games.
Enjoy the evening;
Gene
Gene Inger
www.ingerletter.com
