Monday , 2 October 2023

We Are Fully Invested Bears – Here’s Why

There is no way this bull market doesn’t end very badly. We all know that is the reality of this liquidity-fueled market, but we keep investing for “Fear Of Missing Out.”

Indeed, over the past 5-MONTHS, more money has poured into the equity markets than in the last 12-YEARS combined.

If that chart alone doesn’t get your “Spidey senses” tingling, I am not sure what will. However, I have a few more charts to share with you.

…What drives prices higher or lower is the psychology of investors. As such, we can look at technical deviations to determine how exuberant or not the market currently is.

Moving Averages

For moving averages to exist, prices must trade both above and below that average. As such, moving averages act like gravity on prices. When prices deviate too far from the moving average, eventually, prices will revert to, or beyond, that average.

We can visualize the reversion in the chart below of the S&P 500 index versus its 200-dma. With the index currently more than 14% above its 200-dma, such should be a short-term warning to investors.

The following chart says much the same. Currently, the 50-day moving average is also significantly deviated above the 200-dma and suggests that not only will prices retest the 50-dma but eclipse that level in a reversion back to the 200-dma.

Notably, technical deviations in the short term do NOT mean the market will “crash” tomorrow. Markets can remain deviated for quite some time. However, when the deviations begin to diverge from the price index negatively, such has previously preceded more important corrections and bear markets.

Margin Debt

Rising levels of margin debt are a measure of investor confidence. Investors are more willing to take out debt against investments when shares are rising. The more prices increase, the more they can borrow. However, the opposite is also true. Falling asset prices reduce the amount of credit available, and the liquidation of assets must occur to bring the account back into balance.

I want to make a critical point here. Margin debt, like valuations, are “terrible market timing” indicators and should not be used as such…It isn’t the “level” of margin debt that reflects investor exuberance but rather the rate of change…[and] we can see a very sharp spike in debt from the previous 12-month low…[and that] has only occurred near previous market peaks and bear markets.


…Currently, investors are overlooking fundamentals on the expectation the economy and earnings will improve to justify the market overvaluation. There is scant evidence over the last 20 years such will be the case.


…Through the first quarter of 2021, the economic recovery expected by economists is running well ahead of what the RIA Economic Activity Index – an average of the 4-most essential components of organic economic activity – approximates and, given that much of the market’s advance is based on optimistic expectations, there is potential for disappointment..

…When, or if, expectations of recovery are disappointed, the market will begin to reprice itself for its intrinsic value. Given that the market is currently trading more than twice the level of underlying economic growth, which is where corporate profits come from, such suggests a significant risk.

The level of price versus sales, which occurs at the top of the income statement (and much less subject to manipulation), also suggests a risk.

10-year forward returns are below zero historically when the price-to-sales ratio is at 2x. There has NEVER been a previous period with the ratio climbing to near 3x.

Of course, with markets trading well above 20x earnings, history further suggests that investors are likely to be disappointed in the future as markets reprice value.

and such is particularly problematic when investors chase stocks with no profits.


Despite the understanding that the markets are overly bullish, extended, and valued, and believe things will eventually end badly, we remain long-biased in our equity portfolios…as our job is to participate in the markets with a bias toward capital preservation….[and] from that point of view, as a portfolio manager, the idea of ‘fully invested bears’ defines the reality of the markets we live with today….Short-term…[we are not] willing to take the risk of being grossly underexposed to [potential] central bank interventions…

Bottom Line

We remain “bullish” on the markets currently as momentum is still in play. However, we are also continually taking precautions to monitor and manage risk accordingly…

Editor’s Note:  The original article by Lance Roberts  has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read.  The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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