Sentiment Surveys
The AAII weekly survey of retail US investors shows they continue to return to complacency from the extremely pessimistic stance earlier this month. This week the bulls continue to rise, gaining 4% points to 43% while the bears decline 7% points to 32%. The bull ratio is 57% - in line with the long term average. For a chart, check previous link.

ChartCraft’s Investors Intelligence survey of newsletter editors also shows a similar return to complacency after a slight dip last week. There was a slight increase in bulls to 46.1% and a significant drop of bearishness to 21.3% - bringing the ratio back to 2:1 where it has hovered for the past few months.

The US public continues to be wary of equity investments. The Gallup Investor Optimism survey for October showed a slight erosion, back to September levels. This, despite the S&P 500 being about 10% higher than back then.

Source: Gallup

Option Sentiment
The CBOE put call ratio (equity only) ratio continues to show a majority of call purchases as option traders ignore any real consideration of risk and reach to grab more gains. While the short term moving average of the put call ratio has recovered somewhat from the extreme low in mid October it is still quite low:

The ISE Sentiment index which targets retail option traders is showing about the same preponderance of bullishness. The 10 day moving average of the equity only ISE Sentiment closed the week at 187. That’s lower than last month’s ratio but it is still at elevated levels which have corresponded more to tops than bottoms in the past.

Magazine Cover
This week’s magazine cover indicator comes courtesy of BusinessWeek and features a rampaging bull with the title caption: “The New Threat from Wall St.”

While the imagery represents the symbol reminiscent of the stock market, the accompanying article is about the impact that Wall St. is having on municipalities around the US. Rather than being a barometer for the stock market, it is an indication of the prevailing public mood against the excess of Wall Street investment banks.

The following article is an excerpt from Robert Prechter’s Elliott Wave Theorist. For more information from Robert Prechter on bank safety, download his free report, Discover the Top 100 Safest U.S. Banks.

Perhaps the single greatest reason for the unbridled expansion of credit over the past 50 years is the existence of the Federal Deposit Insurance Corporation, another government-sponsored enterprise created by Congress. The coming rush of bank failures is an outcome made inevitable the very day that Congress created the FDIC. The reason is that the creation of the FDIC allowed savers to believe that their deposits at banks are “insured” against loss.

But the FDIC is not really an insurance company. No enterprise, absent fraud, could possibly insure all the banking deposits in a nation. Nor does the FDIC do so, despite its claims. The FDIC is like AIG, the company that sold too many credit-default swaps. It contracted for more insurance than it could pay upon. Because depositors believe the sticker on the door of the bank, they have abdicated their responsibility to make sure that their banks’ officers handle their deposits prudently. This abdication allowed banks to lend with impunity for decades until they became saturated with unpayable debts.

Today, most banks are insolvent, and the FDIC is broke. This condition is deflationary for three reasons: (1) Banks are coming to realize that the FDIC cannot bail them out in a systemic crisis, so they have become highly conservative in their lending policies, as described above. (2) The main way that the FDIC gets its money is to dun marginally healthy banks for more “premiums” (meaning transfer payments) to bail out their disastrously run competitors. The more money the FDIC sucks out of marginally healthy banks, the less money those banks have on hand to lend, which is deflationary. (3) The banks that have to cough up all this money will become more impoverished at the margin, so banks that otherwise might have survived a credit crunch will be thrown even closer to the brink of failure. This is another deflationary risk.

A friend of mine whose family owns a bank told me that the FDIC recently raised its 6-month assessment from $17,000 to $600,000. In the FDIC’s latest announcement, it is considering requiring banks to pre-pay three years’ worth of “premiums,” i.e. triple the normal annual fee in a single year. It will be a miracle if the money lasts through 2010. When these funds are gone, the FDIC will have two more options: to issue its own bonds and pressure banks to buy them; and to tap its “credit line” of up to half a trillion dollars with the U.S. Treasury. It’s the same old solution: take on more new debt to back up failing old debt. More debt will not cure the debt crisis.

Meanwhile, the FDIC is contributing to the deflationary trend. It has “tightened rules on required capital levels,” which forces banks’ loan ratios to fall; and it has “extended its extra monitoring of new banks from the first three years of operation to seven years” (AJC, 11/19), meaning that banks will now have to wait four additional years before they can go crazy with loans.

For more information from Robert Prechter on bank safety, download his free report, Discover the Top 100 Safest U.S. Banks. You’ll learn how to find a safe bank, the critical difference between lending and banking, tips on international banking, and more.

Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

The markets tend to be in a good mood the week before holidays, since 1950, the S&P 500 is 40-19, up 67.85 of the time during the four day week (including Friday) of Thanksgiving for an average gain of 0.78%

On average, all of those gains come on the two days surrounding Thanksgiving, which are 51-8, up 86.44% for an average gain of 0.80%.

The week after Thanksgiving can be a bit of downer and the markets have a bearish tilt as well, 28-31, up only 47.46% of the time for an average loss of 0.24%

The Turkey trimmings really take their toll on the Monday after Thanksgiving, as it takes the big hit, 24-35, up only 40.68% of the time for an average one day loss of 0.38%.

The last five Monday’s after Thanksgiving have been down, including last year’s (2008) loss of 8.93%.

S&P 500 % Chg for Thanksgiving the Last 20 years:

I couldn’t distinguish a discernible difference in the data in up or down years.

It has been my observation that since these type trading strategies became well documented over the last couple of decades, they tend to be anticipated a day or two. Be careful.

If you’ll recall this is a well worn script. The last time we had a financial crisis, it was the Yen that was used as the vehicle of choice. Massive amounts of capital were borrowed in Yen and invested in other risky assets with the nudge-wink agreement of central banks that it was a one way trade.

Today it is the US dollar that is being sacrificed at the altar of the new bull market… in everything. Roubini has been among the most vocal to raise the alarm. But almost everyone else has decided to enjoy the trade while it lasts.

Of course, the sensible thing is to realize that you can’t drink yourself sober, just as you can’t dig yourself out of a hole. But since when have monetary policy wonks been fans of reality?

While it is difficult to prove definitively that the US dollar carry trade is the reason almost every single asset class has appreciated, its footprints are hard to miss. Here are David Rosenberg’s recent observations on the correlations across asset classes:

Historically, there is no correlation at all between the DXY index (the U.S. dollar index) and the S&P 500. In the past eight months, that correlation is 90%. Ditto for credit spreads — zero correlation from 1995 to 2008, but now it has surged to 90% since April.

There was historically a 70% inverse correlation between the U.S. dollar and emerging markets, such as the Brazilian Bovespa, and that correlation has also increased to 90% since the spring.

Even the VIX index, which historically has had no better than a 20% correlation with the U.S. dollar, has now sent that correlation surge to 90%. Amazing. The inverse correlations between the U.S. dollar and gold and the U.S. dollar and commodities were always strong, but these too have strengthened and now stand at over 90%.

The scary consequence of the US dollar carry trade is that it has pushed almost all risky assets to be correlated. And when the music stops and someone starts to unwind the trade, it will get ugly. When everything you hold is correlated to each other and everything else in the market, even a small tremor of selling will lead to an avalanche as the value of your portfolio starts to decline all at once.

If you expect gold to be a safe haven, you’ll be sorely disappointed. Historically, gold and gold stocks have never been a stronghold in a severe sell off. So maybe that’s why short term T-Bill rates have been pushed so low.

The 30 day T-Bill rate 0.03% which is slightly higher than the double bottom it made in December 2008 and the end of October 2009 at 0.01%. And the 6 months T-Bill rate closed at 0.14% - a low it has seen twice before but is still jaw dropping. They haven’t seen these levels since 1958.

Even more shocking, for some short term government bonds maturing in January 2010 the rate fell to negative. I’m not sure why everyone is suddenly clamoring for US government bonds. Are they afraid that a new shock is coming to the stock market? is there some tragic news that is about to shake global financial market? or are major institutional investors simply afraid that the low interest rate environment and the dollar carry trade will inevitably lead to even more trouble?

And if so, how in the world is investing in US dollar denominated assets and trusting the US government in line with that sort of thinking? Honestly, I’m puzzled.

In any case, this is an important variable which isn’t getting as much attention as it deserves. One aspect of it is that it has an effect on the mutual fund cash level metric which we discussed before.

This is the where the level of cash held by US mutual funds acts as an indicator of market tops and bottoms. Usually it is adjusted to account for interest rates which need to be equalized to iron out the rewards during high interest rates and the punishment for holding cash in low interest rate environments.

While this indicator has been known and followed since it was introduced by Fosback in the 1970’s, I introduced an important improvement on this indicator - an idea that to my knowledge hadn’t been before; to adjust for real rates, not just nominal ones. Adjusting for the effects of deflation/inflation, mutual fund cash levels are actually very low - something which is bearish.

With this recent drop in benchmark rates, this metric drops even further into bearish territory and signals an even brighter red flashing light. And as persevering readers will remember, I cautioned that stocks had little room to the upside when the S&P 500 was at 1098.51 - it peeked above that level and has fallen again. We are now 17% above the long term trend. That’s a slight drop from 19.31% that we saw just a few days ago, but caution is still the watchword.

If you’re new to the blog you probably missed my comment back in early January: Canadian REIT Review. At that time I mentioned that it was irrational for well capitalized companies like the Canadian REITs to be sold off with the rest of risky assets. Remember, not only are these conservatively leveraged, they are diversified and throw off juicy monthly distributions. Of course, a devastating bear market cares little for value. Almost everything was sold indiscriminately as global investors ran like headless chicken to escape further losses.

In early January when I wrote recommending the attractive value evident in Canadian REITs, RioCan REIT, a commercial REIT I highlighted was trading around $14 a unit:

From there it deteriorated further, making a low of $11.50 in March 2009 - along with the vast majority of risky assets. If you were or smart enough to buy at exact bottom, you would be sitting on a 65% gain right now. But if you bought earlier when I wrote about it, it is still a respectable 36% gain. And that’s not even considering the monthly distributions which would pump the total return to 45%.

RioCan, at the March lows, was yielding an astonishing 12%. Of course, because of the pervasive doom and gloom, even the largest and strongest Canadian REIT was suspect. But RioCan has had no trouble in sustaining its distributions due to its top notch management and its heavily subscribed dividend reinvestment plan that allows it to conserve cash by issuing units instead of cash.

In fact, while the US commercial real estate market is seen as the next shoe to drop, Canadian REITs have recovered nicely and are poised for their role as (benevolent) vultures. Sonshine, the head of RioCan raised $150 million, announced a partnership with Cedar Shopping Centers (CDR). As well, the head of RioCan, Sonshine, has hinted of a major upcoming US purchase in the near future.

So all in all, the situation has reversed in all aspects. Now the news is all good and the stock is zooming higher. And as a result, RioCan is now yield just 7.21%. But while things are seemingly rosy, I’m getting ready to leg out of this position. There are a few reasons for that. First, obviously, is the sentiment which has shifted into full sunshine mode.

Second, the rocket ride higher has pushed RioCan to close 26.16% from its 200 day moving average. This is a simple technical barometer which I use to also analyse the general market but it also works for individual stocks. In the past when RioCan has come this far up into thin air territory, it has been unable to sustain its momentum. The last time prices where this far above its long term trend line was back in early 2007, just as RioCan was topping out at $26.

Finally, basic technical analysis reveals that price is now butting its head against the overhead resistance. What was a zone of support has now become a zone of resistance. And while RioCan could technically rise up to $22 a unit, the chances of that are slim. The same chart formation can be seen in almost all of the REITs in Canada. For example, take a look at Allied Properties (AP_un) or Boardwarlk (BEI_un) or Calloway (CWT_un).

Considering everything, putting new capital to work on the long side or continuing to hold here is not very prudent. The probability is that prices will either meander here as they enter resistance or immediately correct. In either case, the ride is over but it was fun and profitable while it lasted.

Please understand that this article is about more than safeguarding your money; it’s about saving you headache and heartache. It’s about giving you peace of mind.

Before I explain, please allow me to ask a few questions:

• Have you given much thought about the money in your banking accounts lately? Do you know if it’s safe?
• Have you thought about what might happen if your bank fails?
• Did you know you could be left in the lurch for days, weeks, even months before you get your money back from the FDIC?
• What happens if the FDIC can’t cover your funds?
• How do you find a safe bank to protect your deposits right now?

I hope you’ve given these questions some serious thought.

I have to be honest: These questions were about the farthest things from my mind until about a year ago, when I downloaded the free “Safe Banks” report from my colleagues at Elliott Wave International. At first, the report scared me: I thought, “Oh My Gosh! I could lose all of my money if my bank fails. What would I do?”

But as I read on, I figured out that the report was not only about making my money safe; it was about giving me peace of mind.

If you’ve read any of the following news items, perhaps you understand the fear of learning your money might not be safe. Here’s a recent story from Bloomberg:

Sept. 24 (Bloomberg) — In May, the FDIC said it was projecting $70 billion of losses during the next five years due to bank failures. The agency said it expects most of those collapses to occur in 2009 and 2010.

The FDIC’s problem is that it didn’t collect enough revenue over the years to cover today’s losses. The blame lies partly with Congress. Until the law was changed in 2006, the FDIC was barred from charging premiums to banks that it classified as well-capitalized and well-managed. Consequently, the vast majority of banks weren’t paying anything for deposit insurance.

Of course, we now know it means nothing when the FDIC or any other regulator labels a bank “well-capitalized.” Most banks that failed during this crisis were considered well-capitalized just before their failure.

By the end of 2009, more than 130 banks will have failed. Most depositors will have little clue their bank was even at risk. Worse yet, the string-pullers in Washington are doing everything in their power to hide information about the safety of your bank from you.

So far, the FDIC has had enough money to cover insured depositors. But that money is quickly running out.

Just last week, the FDIC voted to mandate early payment of insurance premiums to help cover at-risk banks. But only time will tell if this move will provide the funds needed in the years ahead. Here’s what the Associated Press reported on Thursday, Nov. 12:

WASHINGTON (AP) — U.S. banks will prepay about $45 billion in premiums to replenish a federal deposit insurance fund now in the red, under a plan adopted Thursday by federal regulators.

The Federal Deposit Insurance Corp. board voted to mandate the early payments of premiums for 2010 through 2012. Amid the struggling economy and rising loan defaults, 120 banks have failed so far this year, costing the insurance fund more than $28 billion.

Worse yet, three more banks failed the very next day, Friday, Nov. 13.

This is a very real problem and a direct threat to your money. It’s more important now than ever to personally ensure the safety of your bank. The free 10-page “Safe Banks” report can help. It includes the very latest bank safety ratings from the third quarter of 2009 to help you prepare for what’s still to come this year and next.

Inside the revealing free report, you’ll discover:

• The 100 Safest U.S. Banks (2 for each state)
• Where your money goes after you make a deposit
• How your fractional-reserve bank works
• What risks you might be taking by relying on the FDIC’s guarantee

Please protect your money. Download the free 10-page “Safe Banks” report now.

Learn more about the “Safe Banks” report, and download it for free here.

Gary Grimes focuses on mass psychology, U.S. stocks and the U.S. economy. Gary has a bachelor’s degree in journalism from Auburn University in Auburn, AL, where he was first turned on to the Austrian School of economics by way of the world-famous Mises Institute. His study of classical liberalism eventually led him to discover the Elliott Wave Principle and Robert Prechter’s theory of socionomics.

Now another pair of strategists have taken sides - although not as personal as Rogers and Roubini. Dennis Gartman, believes not only that gold is in a bubble, but that it should be obvious to everyone. But that doesn’t mean he’s necessarily climbing off the trend:

Meanwhile, David Rosenberg featured this chart to argue not only is gold not in a bubble, it is actually “cheap”:

Leaving aside the obvious arithmetic (instead of logarithmic) scale, comparing the S&P 500 index to the price of gold is a non sequitur. This is due to the incessant rise of the equity index, with that itself due to the survival bias built into the constituents that make up the S&P 500 index. And don’t forget a dash of inflation which pumps up stock prices and therefore, stock indexes. So a ratio of gold to equity prices will for the most part look like a ski hill - and be as meaningful.

I’m also puzzled why Rosenberg is so bullish on gold since he has been one of the prescient strategists who has beaten the deflation drum the loudest.

Market Measure of Forward Inflation
Other than the CPI figures from the US government sources, there is a market determined inflation measure. It is the implicit inflation as per the Treasury Inflation Protected Securities (TIPS). The TIPS data that I showed back in 2008 is no longer published by the Fed. Thankfully, Bloomberg disseminates a metric based on the nominal forward 5 years minus US inflation-linked bonds forward 5 years. So basically, this is the average inflation that the bond market expects from 2010 to 2015:

Source: Bloomberg

In the final days of last year, inflation expectations were the lowest in a very long time, fallin to just 0.41%. Earlier this month they reached 2.89% but today’s forward inflation expectation was still a muted 2.68%. Clearly, the bond vigilantes are not signaling a runaway inflation debacle in the near term future for the US.

So can it be that gold is in an honest to goodness bubble?

Gold Sentiment
Here are two measures of sentiment for the precious metal. The recent survey of Bloomberg terminal users on their conviction for gold found a remarkable 94% to be bullish.

That is a new record high since the survey started in 2004. Unfortunately, Bloomberg’s survey hasn’t been very good as a contrarian indicator. But it has rarely been above 90%. The closest it has gotten to this level was at the start of the year in January 2009 when it reached 91% bullish. Back then, gold was $900/oz. While there is a short history, the sheer lopsidedness of the recent consensus makes it noteworthy.

Courtesy of Elliott Wave, we get another measure of gold sentiment:

The Daily Sentiment Index (trade-futures.com) has been at, or above 90 percent gold bulls since November 3, a string of 10 straight days. The only other comparable streak of optimism over the past 22 years of data is leading up to the December 2, 2004 gold high when the DSI was at, or above 90 percent for 20 consecutive days. At that time, prices made a high at $458.70, declined over 10 percent, and did not exceed the December 2004 high again for the next 10 months. But during this entire 20 day stretch, optimism never reached the single day extreme that today did, with fully 97 percent of traders optimistic on gold’s future prospects. This time, we expect a larger decline, one that lasts longer too.

• P/E Multiples were 8x, not 26x.
• Dividend yields were 6%, not sub-2%.
• The stock market was trading at a discount to book, not a 2x premium.
• Monetary policy was aimed at reducing money growth and inflation rates, not
  creating both as is the case now.
• Fiscal policy was aimed at reducing nondefense spending, not accelerating it.
• Deficits were peaking and coming down, not surging to 10%+ relative to GDP.
• Global trade barriers were being torn down; not erected.
• Deregulation back then was in; today it is all about re-regulation and
  government ownership.
• Union membership was on the way down; today it is back on the rise.
• The dollar was entering a Plaza Accord bull market, not a mercantilist bear
  market.
• Credit, household balance sheets and participation rates were expanding, not
  contracting.
• Tax rates, income, capital gains and dividends, were declining then; rising now.

He also compares the batch of government bureaucrats and politicians now to back then:

In 1982, Ronald Reagan was President (two consecutive terms as Governor of
California), Don Regan was Treasury Secretary (35 years of financial sector experience), Martin Feldstein as the Chief Economic Advisor to President Reagan (the dean of business cycle determination), and Paul Volcker was Fed Chairman (9 years of prior financial sector experience). Compare and contrast to Barrack Obama (junior senator from Illinois for 3 years); Timothy Geithner (21 years experience in government, three years as a lobbyist); Larry Summers (no private sector experience; 27 years of academia and government) and Ben Bernanke (no private sector experience; 30 years of academia and government).

Which team do you think deserved the higher multiple — the one with actual experience in the real world or the one immersed in academia and government?

To play devil’s advocate, no two bull markets are equal in every way. It is a stretch to require a secular bull market to require experienced politicians for example. But cheap (or at least, reasonable) valuation is a condition that is difficult to explain away.

But even as the stock market continues to power ahead, and longevity of this rally continues to strain all credulity, we can’t ignore that the market breadth is down right horrible. Usually, the measure of advancing vs. declining stocks rises and falls like a tide, keeping a rhythm with the indexes.

Right now however, the 20 day average of Nasdaq’s daily advancing and declining issues is acting the way it would at intermediate lows - even though we’ve well into an uptrend:

This means that fewer and fewer stocks are pushing the averages higher. When we start to see less participation from the wider spectrum of stocks trading on the exchange, we don’t have a healthy rally. My hunch is that most of gains can be laid at the feet of the large caps either because of their international sales exposure or because of the dollar carry trade (sell the dollar and buy anything risky). Check out the Russell 2000 - it has yet to confirm a new year to date high as the S&P 500 index. The same can be said for the equal weight S&P 500 index.

Another cause for concern is just how quickly the index has been able to rise on the back of fewer and fewer rallying stocks. For a bull market to be considered healthy, it has to have staying power. This is an endurance run after all, not a sprint. I measure the speed of a rally by comparing the closing daily price to the long term trend as measured by the 200 day moving average.

While the 200 day moving average has been rising, it hasn’t been able to climb as fast or faster than the price it tracks. So the distance between them as a ratio has increased. With today’s strong close, the S&p 500 index is now 19.3% higher than its long term trend line. That’s slightly more than the last time this same metric made me raise the caution flag: Stocks Have Little Room to the Upside.

That was 11 points lower than we are now. Running the numbers with a 20% and 21% ceiling, we get 1117 points and 1127 points respectively. So imagining that we leapfrog 8 to 18 points from here, we will have hit an invisible wall. Check out the previous link above to see a chart.

So odds are that we either correct here (again) to give the long term moving average a bit of time to catch up. Or prices meander to and fro, not really going anywhere and boring both bears and bulls. There is very little probability, from a historical study of the market, that we will see a rush higher.