On Jan. 24 of this year, we noted “Three Signs Market Sentiment Has Reached Dangerous Extremes.” Within four weeks of that broadcast, the stock market peaked, and one of the swiftest bear market declines in history followed.
Now market sentiment is looking extreme once again. If anything, the new levels of euphoria make the January action look sleepy. We are seeing bizarre market patterns, investor behavior that makes no sense, and even snooty dismissals of Warren Buffett.
We can begin by noting the euphoria is global.
Jason Goepfert of SentimenTrader observes that, in March 2020, every major world index his team follows was in a bear market. Now, three months later, fewer than 15% are still in bear territory, meaning that 85% or more have bounced back. The entire world, more or less, has gone from bearish to bullish.
That level of global-scale reversal has happened only twice before, in 1988 and 2009. In one case the 1987 stock market crash came prior; in the other case it was the 2008 financial crisis. In neither case was there an ongoing pandemic with caseloads and death counts rising.
Moving up the chain of craziness, Bloomberg reported this week that, from the time of the March bottom, every single stock in the S&P 500 has generated a positive return. Not most of them, not the vast majority, but every single one.
What kind of recovery makes every single large-cap stock go up, and more than 85% of the major world indexes go up, all together, all simultaneously? What type of logical rationale is there for seeing the fortunes of every single company improve? Hint: There isn’t one.
One could imagine that, say, a breakthrough vaccine for the novel coronavirus might produce that kind of result — a kind of medical deus ex machina that removed the pandemic threat entirely.
But in reality, we have the opposite of that situation: COVID-19 cases are accelerating in countries across the globe, and in America, ongoing protests have given the virus mass distribution across all 50 states.
The virus is not only still here, it is preparing to wallop us again — potentially quite hard, in a matter of weeks — and that doesn’t even account for the possibility of an additional wave coincident with normal flu season in the fall.
And yet the entire S&P 500 has done a kind of synchronized swimming routine. The way the market is behaving, one would think all forms of influenza have been forever banished from the earth.
As investors drink the Kool-Aid — and as the virus bears down on us anew, with caseloads spiking in state after state, and hospital systems in rural areas of Mississippi and Alabama already overwhelmed — Citigroup warns that its “panic/euphoria model” is flashing its most extreme levels since 2002.
Citi’s panic/euphoria model “tracks metrics from margin debt to options trading and newsletter bullishness,” Bloomberg reports, and now shows “sentiment at the most extreme level since 2002, when the tech bubble was dissipating.”
“We are concerned that thoughtful approaches are being overwhelmed by the need to at least keep pace with price moves,” Citi’s strategists write. “People are ignoring joblessness, trade friction, social unrest, and risks that loom including possible COVID-19 reinfections, the end of bonus supplemental unemployment checks and the upcoming elections.”
Is it delirium born of lockdown fever? A pent-up reaction after months of feeling stir-crazy?
Whatever it is, it sure is something, because even stocks that are belly-up and bankrupt are seeing multi-bagger returns in the space of a few trading days.
As evidenced by their “top 100” holdings list, millennial traders on the Robinhood stock trading app are bidding up shares in names that have just gone bankrupt.
Take Hertz, the car rental company that filed for Chapter 11 bankruptcy on May 21. Hertz found itself crushed under $19 billion worth of debt. The legendary Carl Icahn, one of the greatest investors ever, threw in the towel and booked a $1.6 billion loss on his Hertz position.
And yet Robinhood investors, apparently smarter than Icahn, decided to bid up Hertz shares anyway, creating a 500%-plus return in five trading days.
Nor is it just Hertz. There are others like J.C. Penney Co., who filed a $7.2 billion bankruptcy case on May 15 — and whose shares nearly tripled in value a short time after.
There are more of these, too — like Whiting Petroleum, wholly bankrupt and up more than 300% in the course of a week or two.
When trading busted stocks, the operating theme seems to be: “Find stocks that are trading below five dollars — or better yet below 50 cents — and buy them on the theory they might go up.” Never mind if the company’s equity has already been pledged to creditors, with a 99.9% chance that all public shareholders (those buying and trading the common stock) will get wiped out. If you can sell to the next guy before the gavel falls, it’s easy money.
As further evidence, this rally has nothing to do with actual economic recovery whatsoever, and is just pure liquidity-fueled wackiness at this point, consider that, along with the FANGS, companies with garbage balance sheets are rising as if their prospects were bright.
This makes little sense at all because, were the recovery real, a further steepening of the yield curve and withdrawal of emergency stimulus (things one would expect in a recovery) would crush the companies with heavy debt loads and dodgy balance sheets, or at least dampen their prospects.
Then again, perhaps the market figures that, if a bad balance sheet gets forced into bankruptcy, the Robinhood crowd will make it good for a triple.
Last but not least, in a sign this rally is classic nonsense, bulls are talking smack about old man Buffett.
For all the static he gets sometimes — and the deserved criticisms here and there — Warren Buffett has undoubtedly earned his stripes as the greatest value investor of all time.
Then, too, Buffett’s collection of annual letters (dating all the way back to 1965) is worth more than an Ivy League business school degree, in our view, and as one of the all-time greats, he deserves respect.
You might recall Buffett was a contrarian indicator in the late 90s dot-com bubble, not just due to his own skepticism, but the ease with which permabull analysts claimed that Buffett didn’t “get it.”
When it came to dot-coms, Buffett “got it” just fine, of course, and those who dismissed him as out of touch circa 1999-2000 soon enough received a frying pan to the face.
Our thoughts turned to Buffett on hearing that Ken Fisher, a money manager known for being a permabull, said the Oracle of Omaha was too old for the game.
“The reality of great investors, including my father, is that when they get to a certain age, they lose their edge,” Fisher said in a CNBC India interview last week.
“I’m not suggesting that Mr. Buffett has lost his edge,” Fisher added, “but I can’t find a history of people his age who don’t become relatively static in a crisis.”
It is hard to get more odious than that.
With no real critique to offer, Fisher attacks Buffett solely on the basis of age, then more or less accuses Buffett of losing his edge, and then denies suggesting what he just said, prior to saying it again.
To the best of our knowledge, Fisher runs a gigantic money management operation that is always and forever bullish, and in 20-plus years of seeing his firm’s advertisements and advice plastered all over the web, we have never once seen or heard an opinion from him or his staff that could not be distilled down to six words: “Stocks look bullish, you should buy.”
This isn’t a tough call: When stock market euphoria is breaching dot-com levels, in the middle of a pandemic that is about to get worse, when nearly all large-cap stocks and world indexes are going vertical in a kind of mass levitation, and even bankrupt names are exploding via a zero-commission smartphone app, we’ll stick with Buffett.