Toreador, Ole!

Gives me the willies when I hear what Wall Street types are saying just now. Reminds me of 1980, when the uber bull oil analyst at my firm grabbed the microphone and bellowed, “The risk is not in being in Dome Petroeum, the risk is being out of Dome Petroleum!” Well, the dude caught absolute top tick on both the stock and the oil market.

Same thing today: “You need to take on more risk,” says the chief executive officer of the world’s largest money management firm. “You need to have your portfolio 100% in equities.” Another analyst interviewed in USA Today last week said, “The backdrop that is forthcoming is going to be a nightmare for those who are underinvested in U.S. equities.” Still another: “I’m terrified I’m not long (invested) enough!”

All the brokers I survey are on board with the idea of being fully invested, and that’s no surprise. But the stridency in these guys’ pronouncements is a major red flag. At tops, they just seem to have to scream buy, buy, buy!

Investors are just as optimistic. The American Association of Individual Investors poll shows 19% bears today, the same figure as at the all time high in ’07, and a complete flip flop from the 70% bearish reading at the lows in March ’09.

It’s everybody in the pool, now. Mutual funds have no cash left. The cash position is 3.5%, just a shade over the 3.2 figure at the ’07 top (vs. 12% or more at bottoms), so everywhere you look, you see total conviction. This is a very bad thing.

Finally, and this will seem silly, but the News Magazine Cover Story Indicator is operative again: one of the most reliable indicators of an impeding reversal in a rising market is a cover story in a general news magazine featuring a notable figure in finance. Here is the current one:

There are two things about this cover that give me pause: 1) It’s on Warren Buffett, a guy who has always preferred to be out of the limelight, and 2) Buffett is portrayed as The Optimist. How can this be? Buffett always said “We are fearful when others are brave, and very brave when others become fearful.” What has changed? Is this time any different than other wildly enthusiastic tops? With respect for one of the best investment guys of our era, I don’t believe it. Not for a minute.

Observations

Business is brisk for several of my friends. It should be. Optimism seeps into business decision making when the market has risen for a long time. Socionomics tells us to expect this. But, lest it lull you into complacency, the Wave Principle forecast is that the next five thousand point move in the Dow Jones Industrial Average will be down, not up.

Cheers,

Rod

The author makes no representation as to the accuracy of the quoted material, but believes the sources to be reliable. No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

 

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