First Chink in the Armor, Ted!

If you're movie tastes run to the sophomoric humor variety like mine do then there's a good chance you'll remember that line from a 1998 Ben Stiller flick.  During a meltup like we've had, there's not a lot that can be said without saying the same thing day after day for the past 6 months.  But trends don't last forever and that line also describes the first sign I've seen that we could be close to a major top.

Per the Investment Company Institute, as of the end of August 2009 liquid assets (cash and cash-equivalents) at US stock mutual funds have declined to 4.0% of total assets.  This is down from a peak of 5.9% as of the end of February 2009.  As is their tendency, US equity mutual fund managers were at their most fearful a few short weeks before the end of the 2007 to 2009 downtrend.  Now that it appears they're getting greedy again, it's time for prudent traders to start feeling fearful. 

I saw an article in Barron's the other day describing the current uptrend as a "Red Bull" market rather than a garden variety bull market.  I tend to agree with them as US equity mutual fund managers have stampeded willy nilly into long positions over the 6-month stretch from the end of February 2009 to the end of August 2009.  Consider, by contrast, that post dot.com implosion it took from February 2001 until June 2005 for liquid assets at US stock mutual funds to go from 5.9% to 4.0%.  What took over 4 years to happen after the last major uptrend peak has now taken only 6 months.

In fact, the low in liquid assets as a % of total assets leading up to the dot.com zenith occurred in March 2000 when liquid assets reached a zenith of 4.0% of total assets, the same month most of the major stock averages topped out.  Liquid assets as a % of total assets bottomed out at 3.5% in July 2007, 3 months prior to the October 2007 uptrend peak in most of the major stock indexes. 

A saving grace for those long the market is that I'm not yet seeing signs in my other favorite indicators that a downtrend is at-hand.  Here is a quick rundown of my other favorite indicators which I'll be watching closely for clues to a change in trend;

• Investor's Intelligence Bull/Bear %'s continue to remain below the extremes they reached in October 2007 when bullish % reached a high of 62.0% and bearish % reached a low of 19.6%.  The most recent bullish % was 50.6% and the most recent bearish % was 23.6%.  Bottom line; still plenty of skepticism to power the uptrend higher.
• The NYSE cumulative advance/decline line remains at levels last seen in October 2007 when the major indexes were at all-time highs.  Bottom line; both the generals and the troops continue to remain engaged in the push higher.
• New highs on both the NYSE and the Nasdaq exchanges continue to expand as the price indexes surge higher.  Bottom line; # of new highs confirming the upward move in prices.
• The Coppock Curves of all the major stock indexes bottomed out in either March 2009 or April 2009 and continue upward.  Bottom line; the lows earlier this year were major bottoms.
• The Guppy Multiple Moving Averages show the short-term and intermediate-term moving averages moving upward together with the short-term averages in the ideal position of being higher than the intermediate-term averages.  Bottom line; big money, which scales into and out of the markets, continues to support higher prices.
• Both the S&P 500 and the Nasdaq Composite experienced Golden Crosses in June 2009 with, in the case of the S&P 500, the 50-day moving average continuing to power ahead and constructively diverging from the 200-day moving average.  However, in the case of the Nasdaq Composite the picture is a bit unsettling with the 50-day moving average now rising more slowly than the 200-day moving average.  In other words, the 50-day and 200-day moving averages are now converging on each other, which puts them on the path towards a Death Cross.

In sum, the weight of the evidence continues to support the line of least resistance being upward still.  But as Jesse Livermore would say, the advance raiding party of the main bear army has just dashed by.  Those long the market should not expect much in the way of assistance from US equity mutual fund managers as they're mostly all-in at this point.  As such, it behooves anyone long the market to remain alert for a change in trend in the coming months.

Comments

[Justin Armbrose]

Makes sense. I like it.