Let's go directly to the action.
First on everyone's radar should be the dwindling volumes that are driving the current rally in equities. NYSE volumes have shrunk significantly of late, running as low as 30% below average – which could mean a few things:
1. Perhaps the rally is running out of buyers?
2. Perhaps the greater part of the trade is taking place off-exchange, in the institutionally murkiest of dark pools.
3. Perhaps sellers are holding out for a liquidity-induced jump to Dow 16.000.
4. Perhaps brokerages (who make big margins off commissions) are bored of profits and are discouraging 'overtrading' among sales staff.
Whatever the reason, higher highs on low volume is generally not a positive sign.
And another thing
Two more indicators we keep an eye on are flashing danger at the moment. You should be aware of them, too.
The first is the insider sell/buy ratio, which last week saw wild numbers on the sell side at 434:1. For the week, $1.7 million worth of stock was bought in sixteen separate purchases, while 126 sales totaled just under $750 million.
Why were insiders cashing out in such manic fashion? Everyone going to the Super Bowl? Needed some spending cash for the trip?
Hmm
The second indicator is overall margin debt, which last month hit levels higher than anything seen since Lehman Bros. got a toe tag.
Total NYSE margin debt printed at $276.6 billion, its highest reading since September 2008, though not yet the ultimate highs reached in June 2007 ("Alas, Sabrina, are we headed there again?!").
At that point, overall margin debt read $381 billion, a truly staggering number.
Flog This! And Again!
We hate to belabor any point, but when news persists and it's pertinent, it's also worthwhile publicizing it.
The news is Portugal – yields on the Portuguese ten year note, actually, which on Wednesday spiked to a lifetime high BECAUSE THE SITUATION IN EUROPE IS STILL ON LIFE SUPPORT, AND THE PATIENT WON'T RECOVER IN THE SAME WAY A HEROIN ADDICT WON'T RECOVER IF YOU KEEP GIVING HIM HEROIN AS PART OF HIS TREATMENT. HE HAS TO DRY OUT COMPLETELY, AND IT'S GOING TO BE DIFFICULT, AND THERE'S NO WAY TO AVOID THE PAIN, AND THAT'S LIFE, AND THAT'S THAT.
Whew!
Portugal, it was assumed, would be babied by the European sovereign Life-Saving Device (LSD) until such time as it could make a show of getting its affairs in order, after which it would, of course, proceed with an orderly default that everyone was expecting anyway but, at least, had a chance to plan for (short-sell).
The ugly truth about struggling countries like these is there's really no desire to stop spending, and that a default is imminent. The best that can be hoped for is an orderly dis-assembly of the blocks rather than a violent unexpected hurling of the entire edifice earthward. That could create 'dislocations' – as the well-mannered put it – that could be years in the repair.
So is there no hope for Europe?
A little.
Germany is still hedging whether to get involved in the creation of a pan-European bond issuing agency that would ultimately put Berlin on the hook for all of Europe's financial woes, but that would give the market some hope that the continent won't crack any time soon. But until they get off the pot, doubts will persist, the Euro will slide and the stock market will see less reason to rise for no reason (as it's currently doing).
Weimar memories are the only thing standing in Germany's way.
Stateside, the stock market is uber-bought by a number of measures, now trading two full standard deviations above its 50 day moving average, but still clicking higher. Truly a sight. Here's the way the S&P 500 stacks up for the year:
The top of the red range is two standard deviations above the 50 DMA, the bottom of the green, two standard deviations below.
It rarely gets more overbought than this.
That said, where's an honest investor to turn in these days of sinister forces and historic – even tectonic – social upheaval?
Don't be fooled, friends. A good dollop of dollars is right where you want to be. Liquid, liquid, liquid, and we ain't talking beer. T-bills and short-term money. That's your catcher's mitt. That's where the scared money runs.
Play with it now and you deserve to lose it.
Many happy returns,
Matt McAbby, Senior Analyst, Oakshire Financial
