Why I Believe We Could See a Blow Off Top
The market is prepped for a potential blow off top.
And when I say a “blow off top”, I mean new highs – possibly as high as 3,500 or 4,000 on the S&P 500.
How is this possible?
Because the U.S. is not heading into recession and the entire hedge fund industry is positioned incorrectly.
During the first half of 2019, the consensus view was that the U.S. was entering a recession that would hit in full force during the second half of 2019.
Because of this, hedge funds piled into safe havens like the long-term U.S. Treasury pushing the bond to new all-time highs. That’s shown on the chart below.
They’re all wrong.
The latest GDP number shows 2Q19 growth at 2%. This is similar to the 2.9% increase in sales for Walmart in 2Q19, the largest retailer in the U.S.
Moreover, two weeks ago we saw housing data, jobless data, manufacturing data, and leading economic indicators all come in stronger than expected.
Meaning, the U.S. is not in recession.
True, the pace of growth slowed, but the slowdown appears to be reversing now. Which tells us that the extreme defensive positioning by investors is likely misguided.
According to the AAII Sentiment Survey, only 29% of investors are feeling bullish. That’s astonishing… less than one in three investors feel bullish when we’re basically only 3% off the all-time highs and the economy is still growing?
If that seems crazy, consider this…
Global investment funds have become NET sellers of stocks for the first time since April 2009. Meaning, they’re selling more stocks than they’re buying.
April 2009 was roughly one month after the S&P 500 bottomed during the worst financial crisis in 80-plus years. At that time, stocks were 50% off their all-time highs, with the S&P 500 trading in the 700s!
So investment funds are positioned as though we’re at the worst stage of the greatest financial crisis in 80 years… when stocks are within 5% of their all-time highs! It’s total insanity!
With that in mind, I have a sneaking suspicion that all of these funds are going to become net buyers of stocks in a big way in the next few months.
Consider that unlike you or me, large investment funds need to report their 4Q19 performance numbers to their clients at year-end.
What happens when the market holds up and all of these fund managers realize they’re positioned completely incorrectly and that they’re going to be forced to report terrible returns?
They will be forced to dump bonds/safe havens and pile into stocks.
The Door is Open for a Rally in Stocks
Again, the door is now open to a blow off top move in stocks. And it’s entirely because everyone has positioned themselves for a recession that doesn’t appear to be coming right now.
If you want the analysis I just discussed in a single chart, it’s this one below.
Long-term Treasuries (in orange), which usually rally during periods of economic contraction, have OUTPERFORMED the S&P 500 (in dark blue) so far this year.
That’s insanity. Unless the financial system is about to enter a full-scale crisis right here and now, this positioning is beyond extreme. And remember, GDP is still growing at 2%!
Again, the door is open to a blow off for stocks. And I’ve already shown subscribers of Strategic Impact a secret investment designed to explode higher when the market begins to rally again…
I’ll be telling you all about the details of this newsletter in the coming weeks.
Editor, Money & Crisis