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Investors Floating Up and Down (DJTA, BAC, And More)

01/24/13 by  
Filed under Bourbon & Bayonets

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Good day, race fans.

We’ve got two themes to discuss today.

One is the overwhelmingly bullish/overbought condition of the current market, and the second is the imminent creep higher we expect to see in interest rates.

We’re going to venture some thoughts today on how to play both of these trends.

We’ll start with the equity markets.

You’re Too Excited – Calm Down

The following chart gives a good indication of where we’re situated in the realm of overall market enthusiasm:


Save last October’s spike above 80%, we have never in the last six years seen so many stocks trading at overbought levels as we do today.

Now, remember – an overbought stock is one trading two standard deviations above its 50 day moving average.  It’s not necessarily indicative of a coming crash.  Last October, for example, the market pulled back somewhere on the order of 8.5% before resuming its upward trajectory that led to the highs we’re seeing today.  All’s not lost, friends.  But a drop could be coming.

Look also at a recent Bloomberg poll, that shows investors favoring stocks over other asset classes in 2013 by an overwhelming majority.


Note that while the 53% figure doesn’t seem that high, it’s actually the survey’s highest stock reading at any time since the bull market began in 2009.

Bank of America (BAC) runs a survey of professional money mangers that also shows extreme levels of bullishness.  Have a look here:


These are historic low numbers, and they should force us to look hard at whether we’re a) headed for Armageddon, or b) preparing for a wild, liquidity-driven bull market kickoff, as we at Oakshire believe and have been projecting for some time now.

Here’s another one.

It’s from the same Bank of America (BAC) survey, and it shows the outright bullishness of the pro investor class, who are now more prepared to assume equity risk than at any time since January of 2004.  This is the second highest reading for this indicator ever.


And here’s one more to chew on.

We’ve noted in this space several times over the course of the last eighteen months just how consistent and large the flow of funds was from U.S. equity mutual funds.  The charts had been bleeding red to an extraordinary degree – over $220 billion worth in the last two calendar years, with just a pitiful week or two turning up net positive over the whole period.

Until approximately ten days ago.

Then something switched.  All of a sudden – as if on cue from some higher financial power – retail investors decided en masse to buy stock funds!

Look here:


What in the world!?

Extraordinary.  We just witnessed the biggest net inflow into long only mutual funds since the height of the tech bubble in March 2000, and the fourth largest net inflow in history.

DJTA Leading the Pack

Let’s take one more look at a single stock sector – and one that has some predictive ability, to boot – the transports.

It’s generally understood that the transports lead the industrials, with orders to ship product usually being made months in advance of actual production.

We saw the likelihood of a transport breakout before most, but we never imagined what would ensue.

Look here:

DJTA Last 45 Sessions

This is the Dow Transports (DJTA) for the last three months.  Of especial importance is the +80 reading on the RSI (at bottom, in red), normally indicative of an imminent pullback.

And after a 1000 point, 20% rise in just two months, the old gal deserves a rest, no?

As far as we can see, the trannies are the most stretched of all the market sectors and anyone looking to take advantage of a general market retreat would be wise to look closely at an outright short of this sector, a purchase of PUTS or a short term sale of CALLS.  At the very least a bear CALL spread to take in some premium would be advisable.

Interest Rates A’Rising

The prospect of funds flowing out of fixed income securities and into equities over the next eighteen months looks strong.  And with rates backing up, how do investors take advantage of such an eventuality?

We think it’s advisable to diversify somewhat.  As much as we tout the explosive potential that’s about to manifest in stocks, we also believe there’s room for fixed income product in everyone’s portfolio.

But it has to be the right kind of fixed income product.  There’s absolutely no room for vanilla Treasuries at this point, in our opinion.  They’re a losing proposition.

What is advisable is floating rate notes and, possibly preferred floaters., instruments that increase their payments and/or increase in value as interest rates rise.

As for the former, ask your broker what he’s got in inventory.  Failing that, here are a few suggestions on the ETF front (in no particular order).

  1. iShares Floating Rate Note Fund (NYSE:FLOT),
  2. Market Vectors Investment Grade Floating Rate (NYSE:FLTR)
  3. SPDR Barclays Capital Investment Grade Floating Rate (NYSE:FLRN)

As for floating rate preferreds, here are just a few, offered without comment or recommendation:

  1. AEGON N.V. 6.2996% Floating Perpetual Capital Securities (NYSE:AEB)
  2. MetLife Inc. Floating Rate Non-Cum. Pfd. Series A (NYSE:MET-A)
  3. Morgan Stanley Non-Cumulative Pfd Stock Series A (NYSE:MS-A)


Many happy returns,

Matt McAbby

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9 Comments on "Investors Floating Up and Down (DJTA, BAC, And More)"

  1. Cuyler Salyer on Fri, 25th Jan 2013 9:15 PM 

    Hi Matt;

    What I see to is a pull back, but it looks to me only a mini wave IV in the Wave V of the Trannies. That means we’ll probably habe that expected explosive move to the upside after the Trannies correct back down to the 5500-5600 area.

    And since we’re in an extended 5th Wave mimicking an extended 5th Wave in like Commodities, I would be suprised if it tops out in the 6200-6300 range. It should be one hell of a bang (Pop) when it explodes and we head lower.

    Maybe this is all happening as the markets are now viewing Stocks like Commodities – as it’s Ole Ben that determines the
    quantity of the funny money sloshing around Wall Street? That and combined with the flight of money from Europe, and I guess they’re starting to feel our Stock Market is the soundest in the World? NOT!

  2. Robert Fournier on Fri, 25th Jan 2013 10:38 PM 

    In my opinion, the Bull Market has more room to the upside.

  3. Ross Snyder on Sat, 26th Jan 2013 12:00 AM 

    The historic inflow of money into equities in 2013 is due almost exclusively to the fiscal cliff.

    (1) Congress threatens falling over the fiscal cliff.

    (2) Cash cow companies issue one-time large dividends by 12/31/2012 to avoid future tax increases.

    (3) Many, or most, investors re-invest those dividends early in 2013. Certainly the mutual funds and ETF’s do … otherwise, their holdings would be too cash-heavy.

    (4) The jump in stock prices in January 2013, higher volume, and dropping VIX, increase investor confidence. Buying continues.

    … The funny thing is, if after receiving these special dividends, investors just sat on their money, the cash/equity ratio would be the same as it was 12/31/2012. For example:

    12/31 Investor A holds 100,000 sh XYZ (1% market cap)

    12/31 XYZ’s balance sheet $100,000,000 cash and no debt (therefore, Inv A “holds” $10 million)

    12/31 XYZ issues $10/sh special dividend to all 10,000,000 shares

    1/02/2013 Investor A holds 100,000 sh XYZ and $10 million cash proceeds from dividend

    1/03/2013 Investor A reinvests $10 million in more shares of XYZ, and now holds no cash … and the company holds no cash.

    1/03/2013 Investor B, the seller, probably sold higher than the 12/31 stock price AND got the dividend. Good for B!

    2/01/2013 Investor C gets irrationally exuberant and buys more XYZ. Good for A for holding and buying more!

    It’d be interesting to compare net inflows at other one-time dividend moments … there have been a few, perhaps once every decade or two?

  4. Ross Snyder on Sat, 26th Jan 2013 12:02 AM 

    bad math ($1 million, not $10 million) but you get the picture

  5. Michael on Sat, 26th Jan 2013 2:33 AM 

    Matt I have some 401k money that is invested in a bond fund
    through City of San Francisco, I can move it into one of several stock fund offered or I can transfer the funds to TDAmeritrade where I imagine I would have a greater selection of funds to choose from.. Your analysis doesn’t mention bonds or bond funds which often is inverse of stocks. Yet with higher interest rates expected one might expect bond prices to drop.

    I would appreciate your comments.


  6. steve linn on Sat, 26th Jan 2013 1:23 PM 

    I’m wondering what your thoughts on Apple are.
    Appreciate your insights.

  7. Paul Sutton on Sat, 26th Jan 2013 2:45 PM 

    I would suggest that the best ETF way to play rising interest rates would be TBT, especially if you really think rates are going up. the rise in the 30-year treasury from about 3.03% to 3.13% took TBT up nearly $2 from 64.78 or so to about $66.56 between Thursday’s close and Friday’s. While TBT can be volatile, trends tend to remain trends until the trend reverses.

    If the stock market is peaking or getting ready for a 5% – 10% retracement, then I’d expect the long bonds will again dip down below 3%, the 10-year, to maybe 1.75% – 1.8% or so, presenting an excellent buying opportunity for short bond funds.

    The one’s listed in the article simply don’t offer the reward for being right that TBT does, and in at least one case, the volume is so thin that I’d be concerned about liquidity.

    One point on the transports is that last week, the volume on the DJ-20 was up for the week, but almost 25% below its volume one year earlier. I’m not sure that volume matters much anymore, if it ever did, as the DJ-30 is still operating at volumes, again, down over the past year, more reminiscent of the late 1990’s, pre-bubble-burst a la

    And one further thought. The markets are certainly toppy, but I think we could be surprised at how toppy they get before they turn over, and I won’t be making any covering moves until it does top, rather than try to anticipate when it will top.

  8. Paul Sutton on Sat, 26th Jan 2013 2:50 PM 

    To Matt:

    If you check some ETFs covering Europe you’ll find that Europe began turning back up, and interest rates there turning back down in about August of last year, so I’m not sure that Europeans are driving our markets higher. And again, if volume turned up as the article notes, it’s still far lower than in the past. My suspicion is that if 70% of all volume is flash-trading, then it’s also reasonable to expect that on up days, flash-trading volume goes up as well as algorithmically, making money for the bot-trading is easier on up days than on down ones. It’s possible that a significant amount of the increase in volume is actually flash-trading rather than “people-trading.”

  9. Jack on Sat, 2nd Feb 2013 5:49 PM 

    I’m a retired economist. A good friend shared your email.
    America is in deep doo-doo. “FDEFX” is supposed to explain the latest GDP drop — defense spending.

    Until we get our legislators to represent their constituents, this chaos will continue,OR FURTHER WORSEN.

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