Larry Berman: Evidence of a melt-up bubble grows
Members of the American Association of Individual Investors (AAII) told us last week they are very bullish, but not all of our PRO-EYEs metrics are lined up that way…yet. The last several times our Berman’s Call PRO-EYEs composite hit these levels, the odds of a correction have increased significantly.
Evidence of a melt-up bubble is everywhere. Bank of America noted last week that more money went into stocks the last five months than in the last 12 years combined.
Futures markets do not show same positioning, but the above analysis from BofA clearly suggests the degree of froth is massive. The Commodity Futures Trading Commission provides a weekly breakdown of positioning in futures and futures options markets. In our chart, we show the AAII (Bull/Bear ratio) Z-Score and the net speculator positioning in the S&P 500 E-Mini futures Z-Score. The Z-Score allows us to measure the mean deviation historically to best measure extreme readings. The last time both lined up was following the U.S. election and the Pfizer vaccine announcement.
S&P 500 with AAII (Bull/Bear Ratio) and CFTC S&P 500 Futures net Speculator (Z-Scores)
Overall, the tactical factor of our model was up five per cent last week to the highest reading since before the pandemic. While the S&P 500 made new highs, the seasonal factors (around Q1 earnings) are still strong for the next several weeks and is outweighing (for now) overbought readings building in breadth and momentum factors. Falling volatility is a near-term positive too as we have not hit complacent extremes yet. A major risk-off signal is setting up and high caution is warranted.
The overall PRO-II composite was up 3.4 per cent last week and now shows the highest readings since a few points in 2019 and early 2020. The last time the composite indicator was this high it was followed by declines of five to 10 per cent with a high probability. It was at similar levels in January 2020 as COVID-19 was beginning to become a pandemic. We do not have the (obvious) catalyst for a 35 per cent correction with the liquidity in markets (always Black Swan risks), but a 10 per cent-plus correction is a growing risk for U.S. large caps in Q2-Q3. Recall, the average correction historically is 13.4 per cent.
This week in our weekly Thursday Spring 2021 Berman’s Call virtual roadshow we will focus on how to read many of the components of the PRO-EYEs tactical factors and how you may want to incorporate this into your portfolio. Register at www.etfcm.com or at www.investorsguidetothriving.com. The format this series will be a 30-40 minute weekly presentation that changes each week to current market developments and a 30-40 minute Q&A.
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