Stock market volume has been at multi-year lows while the market has been trading sideways for three weeks. In this type of environment it is difficult to come up with something insightful to say on a daily basis, which has been the reason for the dearth of posts recently. In this post I will give an update on some sentiment indicators and take a step back and give some of my bigger picture views.
Market Vane, Hulbert and Consensus are now within spitting distance of showing extreme bullishness but are not there yet. I suspect that if we get another rally in early September the sentiment indicators will reach an extreme. That would set us up for a bigger correction in the September/October time frame.
I am not a fan of the market at these levels. The valuations are so-so and the macro-economic risks remain. Everybody seems to be in agreement that China is facing a large slowdown. Most believe that we will be able to decouple from China and it will effect us minimally. In my experience it rarely works that way, especially in a connected world.
The bull case is that credit spreads are low, allowing for cash M&A and share repurchases. The US economy seems to be moving along, albeit slowly, and profits are largely holding up. Most market participants are not positioned aggressively and many are badly trailing the market. If the economy holds up its possible that many of these managers will be forced to chase the market.
For the vast majority of my investing career the market has been overvalued. There is no reason we can't go there again. But this is not a thesis I like to invest based upon. I am long a few value names but have some market hedges in place. I am also engaged in some relative value trades. This is not a time where I am being aggressive.