Market Risk Elevated Heading Into Distribution Season

 

Just a short note this week so that I can catch up on my “Turkey Induced Coma.”

Despite three consecutive Monday announcements of “potential vaccines,” an agreement by President Trump to allow the Biden Transition to begin, and a holiday-shortened trading week that left the “inmates in charge of the asylum,” the market hasn’t done much with it. As of Friday, the market is only about 1.62% higher than it was three months ago.

Unfortunately, as we will discuss in more detail momentarily, the surge in November, one of the largest monthly advances in history, consumed the entirety of the market’s oversold condition that existed before the election.

Furthermore, you have to wonder precisely how much “gas is left in the tank” when even perma-bears are now bullish.

Consequently, you will notice the previous peaks in perma-bull exuberance have coincided with short-term corrections.

Therefore, the question we should ask is “if everyone is in, who is left to buy?”

A Lack Of Buyers

As I have noted previously, one of the primary drivers, unsurprisingly, is the extremely easy “financial conditions” caused by low-interest rates, fiscal and monetary policies. Consequently, easy financial conditions have historically also come with a “price tag” attached. (Chart courtesy of Tavi Costa of Crescat Capital)

Furthermore, investors’ extreme bullishness, particularly post-election, has dragged buyers into the market. As David Larew of ThinkTankCharts notes, the National Associate Of Investment Managers is carrying above 100% exposure to stocks (leverage). Such levels of ownership have previously coincided with short- to intermediate-term corrections in the market.

Correspondingly, the surge in buying has also pushed investors to give up hedging portfolios by buying “put options.” With the Put/Call ratio back to more extreme conditions, market corrections have generally been close by.

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