Saturday, May 26, 2012

BTFD until the SHTF

Buy the Fucking Dip [BTFD] - that's Wall Street's mantra these days.  And why not, it's worked well for most of the past three years, save for a couple of notable market meltdowns.  As I have said before, Central Bank liquidity programs are payoffs for large institutions to look the other way to risk.  Therefore, not withstanding worsening fundamentals in Europe, here in the U.S., and in China, I have yet to find one stock analyst saying that stocks are an outright sell.  Small investors, on the other hand, having just gotten unfriended by the Facebook IPO, are selling big time...

According to many pundits that I read, 'sentiment' among institutional investors is very bearish, which means investors say they are cautious on the market, yet the charts and data tell a different story.  

Below, is the latest Investors Intelligence survey.  The black line is the stock market and the red line shows the current level of bearishness.  As you see, bearishness is now only now starting to rise (far right) and is far lower than it was last August:

Meanwhile, retail investors continue to sell stocks, with net outflows from stocks 11 consecutive weeks in a row, leaving mutual funds with minimal cash buffers, which is extremely bearish.  And yet, market contrarians see this mass exodus from stocks as a sign that the small guy is once again cashing out at the 'bottom'.  Unfortunately, last week's Facebook fiasco was just the latest resounding reminder to small investors that the stock market is rigged in favour of large institutions.  Small investors have been getting pounded for 12 years straight, so any notion that they are going to rush back into stocks, is wishful thinking of the tallest order.

But my favourite chart as always, shows the options volatility index (VIX) which is a gauge of actual investor anxiety - mapped against the market (below).  I took a slightly different view (zoomed) in to show last August's meltdown relative to where we are today, for comparison purposes. The blue box shows where the market was last August relative to today, with the VIX at 25, which is the level it hit this past week.  Notice that last August, when the VIX hit 25, the market had fallen only 60 points, whereas at this point, the market is down 120 points from this year's high i.e. BTFD.  The other key takeaway is the volume bar chart at the bottom which shows that last August's decline did not end until volume spiked massively (along with the VIX).  Now you see volume is nowhere near the levels it was back then, another sign that investors are taking this price drop in stride.  Volume and Volatility spike when investors capitulate, shaking out the weak hands and allowing the market to resume its upward climb.  Also, it means that investors have bought substantial options protection which protects their portfolios against further decline.  If everyone just sits around fat and happy while prices drop, then the decline will continue, until panic occurs, at which point, the term "Flash Crash" will take on a whole new meaning:

One Chart to Rule Them All
But you don't need fancy charts like the one above to know the real economy is toast.  Just look out your own window, or notice which stock went parabolic and made a new high this week (very few did):