STAFF NEWS & ANALYSIS
Stock Market Last Gasp: Could Equities Jump Up Hard?
By Daily Bell Staff - April 07, 2016

The $1 Trillion Short Underlying Stocks’ Spring … Short interest reaches highest level since 2008 despite gains … Level is contrarian bullish, sets up powerful rally, says BofA … A funny thing has happened in the U.S. stock market, where rather than loosen their grip bears have grown ever-more impassioned. They’ve sent short interest to an eight-year high and above $1 trillion, by one analyst’s math. -Bloomberg

Could the stock market move up hard in these upcoming months? Sometimes contrarian sentiment is an indicator of an unexpected stock market rise. And bearish sentiment is overwhelming at the moment, as you can see from the above Bloomberg excerpt.

So are we looking at a break out? It doesn’t seem likely of course for the reasons we and others have enumerated. Stocks are over-extended by any rational measure.

In fact, equities are almost always extended in our view, but it’s worse now. They’re far more expensive than their earnings give them any right to be and the main motivator of the economy remains excessive  monetization.

But sometimes that doesn’t matter to the desperate, broke and confused mass of “investors” who tend to pile into securities just in time to lose most or all of what they’ve  committed.

Nonetheless …

“There’s an enormous demand coming,” said Thomas J. Lee, managing partner at Fundstrat Global Advisors LLC., in an interview with Bloomberg TV. “Retail investors are about to put a lot of money into the equity markets because they’re trend followers and the S&P has had two positive quarters in a row.

Could this actually be the case? The professional community is certainly doubtful about equity performance. “Position reports from the Commodity Futures Trading Commission show mutual fund managers are more skeptical now than any time since at least 2010.”

Disbelief is rampant, according to the Bloomberg article. It’s hard to believe that the $2 trillion has been “restored to share values in six months.”

But for those predicting additional upward moves in stocks, the huge short positions are further justifications for the possibility. A trillion dollar short position is simply too much to sustain for long.

Shorts will have to pull in their proverbial horns at some point if the market doesn’t turn soon. And collapsing short positions will provide additional upwards momentum.

Remember the much-mocked bullish chorus, “Dow 20,000?” Perhaps we’ll hear it again. Perhaps this time it will actually happen.

It shouldn’t of course. As we pointed out yesterday – and have pointed out regularly for years – Western economies are Keynesian hoaxes. They run on monetization and inevitably the money printing mechanism erodes real prosperity.

Eventually, after a couple of decades, the real economy has been so diluted that jobs and prosperity lapse amidst asset collapses and market breakdowns.

We’re certainly at the terminal stage today. The situation is similar in our view to the end of the 1930s before World War II.

We tend to believe that World War II was actually a response to the Depression. Just like now, businesses didn’t know whether counterparties were solvent or not and refused to make investments.

The war attacked this reluctance because it gave government the justification to demand investments as factories changed over from making cars to tanks.

This sort of prosperity doesn’t last but it is effective in the short run. Germany stimulated its economy in the 1930s with weapons production. Russia mandated an “industrial revolution” under Stalin.

It’s easy to create an industrial surge. The trouble is keeping it going – since the industries created usually have little or no relationship to consumer necessity. This is why free-markets work and “planned” ones do not.

Today, we seem to be at the terminal stage for the world’s economy. And yet there could be a market surprise to the upside. It’s happened before when the majority of “sophisticated” investors don’t expect it.

The reality is that people don’t have many choices these days. Most haven’t a clue about how perverse Western economies have become. If you explain that central banks fix the price of money – and that price fixes in the long term do horrible damage – you well likely get blank stares.

What people do understand is that employment is hard to come by. And those that have jobs are worried about keeping them. People are being paid less these days and working harder.

If the notion strikes them that the market is about to get “hot,” then they’ll likely take the chance just because they don’t have many other options.

We’ve compared this decade to the 1970s and made the point that a low-employment, high price-inflation environment is creating “stagflation.” Just the other day we pointed out that this notion was gradually making its way into the mainstream media.

During the 1970s, real-estate and stocks had a tempestuous run – sometimes up and sometimes down. And some people made fortunes in mining stocks, a market that only soured after the price of gold collapsed after the end of the decade

In this decade, however, we think that any further market ascension will inevitably end in a catastrophe that will usher in a good deal more emphatic globalism.

Conclusion: So enjoy a continuation of the up market – if it comes – while you can. We’ve emphasized the superiority of private investments over public ones in the past and have no reason to change. If the market moves, many more IPOs will offer their investors significant profits. But we wouldn’t advise those individuals to remain in the markets. When they do break, they won’t come back to what they were.

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  • robertsgt40

    I keep waiting for the sucker punch. Just a matter of time. Gotta get as many as possible under the big top before cutting the ropes and torching the circus. Not gonna be pretty.

  • Bruce C.

    If it doesn’t make sense it will probably happen. Since both sides of all comprehensible events cancel themselves out, only the the least rational and foreseeable remain.

    • alaska3636

      Armstrong thinks that a collapse in confidence in government in the next year will send the Dow off into the stratosphere. Or at least, that’s what I think that he thinks:
      https://www.armstrongeconomics.com/future-forecasts/the-dow-what-next/
      “Nevertheless, even technically, the Dow is penetrating resistance and attempting to muscle its way ahead, despite those yelling there will be a huge crash once again.

      It does not appear that we are ready for complete liftoff until the first quarter of 2017. It appears that we are looking at a collapse in public confidence and that is what we need for liftoff in this shift from public to private confidence. The Panama Papers will help with time. All governments are corrupt. That is a foregone conclusion. The question remains, when will the general public reach the reality that government is not there to protect their future? Politicians only fill their own pockets and are no different than the communist leaders before 1989.

      So support now lies at 17434 and 17120. Daily closings below these numbers will signal a near-term correction. Holding 17434 on a closing basis in any retest of support signals a revisit of the resistance. Only a weekly closing above 17846 will signal a retest of the major high. Do not expect a breakout until 2017.”

      • Bruce C.

        Well, a stock market rally in response to a capitulation in the public’s trust in government certainly makes no sense, so he could be on to something.

  • apberusdisvet

    Corporations have kicked the can on financial engineering for over 5 years now (non GAAP accounting, stock buy-backs, etc), but the brick wall looms large. I see the Bloomberg thesis as nothing more than subtle propaganda. After all, the elites wouldn’t want funds flowing into alternative investments, like gold.

  • 2bvictorius

    Is it stock market, or, shock market?
    For what it’s worth, I believe the very best stock market analysts are persons who cannot read, failed math, believe there really is a man in the moon whose diet is green cheese, compliments of the cow, that occasionally jumps over it, from it’s pasture on the beanstalk, planted by a guy, named Jack, who lives on the hill with a girl named , Jill, who was actually born in Kansas and has a dog named Toto.

  • alaska3636

    Here’s an article that seems to fundamentally misapprehend art and its connection to the expression of human ideas:
    Painting like mankind’s greatest artists is almost too easy now
    https://www.washingtonpost.com/news/innovations/wp/2016/04/07/painting-like-mankinds-greatest-artists-is-almost-too-easy-now/

    It is interesting, I will grant. A computer generated Rembrandt painting or Mozart symphony still misapprehends that art is the product of human action and the desire to express ideas and feelings in with whatever means are available.

  • r2bzjudge

    Who is doing the shorting? The dumb money or the smart money?

  • Pater Tenebrarum

    Please note: both at the year 2000 and the year 2007 peaks short positions were also at a record high. It means absolutely nothing. First of all, nowadays many short positions are the result of market neutral strategies, and are therefore not directional bets. Secondly, actual short side traders are pretty much the best traders around – they have to be, since the market rises 67% of the time due to constant monetary inflation.

  • Danny B

    A rally of some sort is possible,,, even without ANY earnings. BUT, the fundamentals say that it won’t last long.

    “The present 12.3 million manufacturing jobs is the same # the US had as of July 1941 ” Hambone’s stuff

    VERY interesting article linking the Nikkei to the S&P 500 http://www.zerohedge.com/news/2016-03-24/when-does-us-stock-bubble-burst-best-hedge-fund-2016-has-surprising-answer
    This model would assume the S&P would then trade somewhere between 1400 and1600

    The default rate in junk bonds is expected to hit 40%. That makes it
    numerically impossible to profit from the junk bond market. LOTS of
    people are piling in anyway. http://www.zerohedge.com/print/528056

    #5 S&P 500 earnings have now fallen a total of 18.5 percent from their peak in late 2014.

    #7 The average rating on U.S. corporate debt has fallen to “BB”, which
    is lower than it has been at any point since the last financial crisis.”

    http://theeconomiccollapseblog.com/archives/19-facts-that-prove-things-in-america-are-worse-than-they-were-six-months-ago
    There will be enough of a rally to pull in the muppets so that the financials can unload their garbage.

  • Johnny Canuck

    What isn’t mentioned is the U.S. gov position in U.S. equities garnered since Bob Rubin and Bill Clinton’s time – guesstimate – $3.5 trillion. It is undisclosed, non-transparent and likely now in the money but with a questionable ROR since inception thus remaining quiet. Just about every major economy owns stocks, mostly domestic, a logical but ill-conceive idea. The result is outlined above and when can the positions ever be sold?

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