U.S. Stock Market: Are Individual Investors Now Fully Invested?

While generally not a big fan of weekly sentiment polls, the latest weekly survey results from the American Association of Individual Investors caught my eye. After missing most of the bull market in U.S. stocks that began in March 2009, individual investors now appear to be fully invested and fully committed to the long side (at the top, perhaps?). The latest AAII poll shows the bullish percentage is now at 51.9%, while bears among individual investors have dropped to only 19.2%. Even though these numbers are not at ultra extreme levels, they are certainly noteworthy outliers when compared to weekly AAII results over the last five years.

And here is one of the greatest charts I have ever seen as it relates to potential investor reserves or potential "firepower" for additional gains in the U.S. stock market. The author of this analysis is Lance Roberts of STA Wealth Management (www.stawealth.com). I found this chart after a simple Google search on NYSE Margin Debt. Doug Short at www.dshort.com highlighted this chart on one of his many well researched articles. In the chart below, Lance Roberts calculates Investor Credit as the sum of Free Credit Cash Accounts plus Credit Balances in Margin Accounts minus Margin Debt. The research is brilliant and clearly demonstrates (to me) that Individuals are leveraged to the hilt with U.S. stocks right now, and I think it is safe to assume that there is NO ADDITIONAL FIREPOWER from this source of potential buying to support any significant further gains in the U.S. stock market!

On the international front, saber rattling between Russian President Putin and most Western governments is escalating on a daily basis. While I can't vouch for the exact translation, according to a Reuters report, here is part of a pretty scary speech Putin made in Moscow yesterday (Friday 8/29):

"Russia is far from being involved in any large-scale conflicts. We don't want that and don't plan on it. But naturally, we should always be ready to repel any aggression towards Russia." Putin then goes on to say "Russia's partners should understand it's best not to mess with us. Thank God, I think no one is thinking of unleashing a large-scale conflict with Russia. I want to remind you that Russia is one of the leading nuclear powers." 

Ouch! Is there anyone who really thinks Putin is scared of a few sanctions from the West? The Russian-backed separatists in Eastern Ukraine have clearly won against the Pro-Western Kiev central government, and you can bet the ranch that hard fought territorial gains for separatist forces will continue to expand in the days and weeks ahead. Increased Western sanctions will do nothing to change this outcome, but additional sanctions will almost certainly guarantee a steep recession in Europe over the next several quarters at least! (Postscript to this paragraph added Sunday, August 31: Russian President Putin on Sunday raised his rhetoric over the situation in eastern Ukraine, saying for the first time that the region should perhaps become an independent nation. "We need to immediately begin substantive talks," he said in an interview with Russian state television, "on questions of the political organization of society and statehood for southeastern Ukraine with the goal of protecting the lawful interests of the people who live there.")

Lest we forget that there are a few things happening elsewhere in the world, in the Mideast today (8/30), King Abdullah of Saudi Arabia was in the news this morning suggesting that the next potential target for jihadists (now sweeping through Syria and Iraq) will be Western nations (presumably he means the U.S. and Western Europe) unless there is rapid and immediate action to thwart this extraordinary threat. 

To say this is an interesting landscape to be an investor right now is the ultimate understatement! The black swan population is no longer an endangered species, in my view!

I think it may be noteworthy that the only major U.S. stock index that was down last week was the Dow Jones Transportation Average (-0.26% on the week). While most other major indexes were up between 0.50% and 1.5%, Biotech stocks surged more than 6%, on average last week. The action in Biotech issues could be considered "frothy" !

And I think I have saved the best for last in this column today. The CBOE VIX Index was actually UP 4.45% last week. How is this possible given the steady and modest across-the-board daily gains last week. According to my formula, the actual volatility of the S&P 500 Index last week was just 3.23 for the 5-day period Monday through Friday. Yet the VIX Index strangely jumped 4.45% on the week to end at 11.98. 

What could be happening here? Is a big move about to unfold? The answer is a resounding YES!

In the interest of full disclosure, I have a significant short position in the S&P 500 Index in my managed accounts. Here are two key monthly charts with all signals reflected from my computer trading system:

(Second Postscript Sunday night, August 31, 4:20 PM Central Time: Chinese e-commerce company Alibaba plans to launch its U.S. initial public offering, which could raise more than $20 billion, early in the week of September 8th. Base upon this information, the initial valuation of this company is therefore estimated near $130 billion. With corporate stock buybacks now in decline, and corporate profit margins narrowing, and the Federal Reserve in a "stealth tightening" period, the Alibaba IPO will be looked upon as the ultimate "straw" that broke the back of the 66-month old bull market in U.S. stock prices when we are sharply lower in a full-fledged bear market three months from now.

Dow Jones Transportation Average Monthly Chart with Computer-generated Buy & Sell Signals

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals

S&P 500 Index Closes Above 2,000 ... What's Next?

Despite some late day profit-taking, the S&P 500 Index managed to close above 2,000 today for the first time ever. The final tick was 2,000.02 as compared to an intra-day high posted late morning today at 2005.05. If an investor could have bought the exact intra-day low at 666.80 in early March 2009 and then held his position until today, he would now have a 200% gain, almost exactly.

Just a couple of quick notes this evening:

1. I think it's noteworthy that the Dow Jones Transportation Average AND the Dow Jones Utility Average both closed lower today (-0.39% and -1.00%, respectively).

2. A daily chart sell signal was triggered today by my computer system in the SPDRs Select Sector Utilities ETF (XLU).

3. A daily chart buy signal was triggered by my computer system today in the TYX 30-year Treasury Bond Yield Index. This is equivalent to a sell signal in the actual 30-year T-bond price.

4. A buy signal was triggered by my computer system yesterday in the VIX (CBOE Volatility Index). This was unusual because yesterday was another low volume UP day in the market.

5. Daily chart sell signals were triggered by my computer system yesterday in the Philadelphia Semiconductor Index (SOX) and the Semiconductor Holders ETF (SMH).

6. Does anyone really think that Russia will let the separatists in Eastern Ukraine be defeated by the Pro-Western Kiev Central Government? No chance!

7. Does anyone think that the latest crisis in the Mideast involving ISIS (or ISIL) will be resolved anytime soon? No chance!

8. U.S. Durable Goods Orders were up a record 22.6% in July as reported today, and U.S. Consumer Confidence jumped to a 7-year high this month. The Federal Reserve is already well into a "stealth" tightening with its "taper" of monthly bond purchases. How long now before Yellen & Company have to telegraph the real tightening that's just around the corner? Bullish investors are so delirious now that I actually read a report today which suggested that Fed rate hikes would be good for stock prices! Simply incredible!! What's clear to me is as soon as the Fed telegraphs its first rate hike (for later this year or in Q-1 2015), four more rate hikes will be immediately priced into the market. The 10-year T-note yield will rise above 3.00% from its current level near 2.39% before you can say "Bear Market"!!

9. Does anyone really know what's happening in China's economy right now? Is there a housing price collapse now underway there that will dwarf the post-Lehman housing collapse in this country in 2008? The debt crisis in China looks very real and is now an imminent threat to the entire global economy.

10. In my humble view, the level of corporate stock buy-backs has peaked; the level of M&A activity has peaked; and corporate profit margins have peaked.

In the interest of full disclosure, I am short the S&P 500 Index in my managed accounts. I fully expect to capitalize on a major correction in the U.S. stock market over the very near term horizon.

Postscript (added Wednesday Night August 27th): A daily chart sell signal was triggered today in the U.S. Dollar Index (DXY). This sell signal is especially noteworthy given the apparent recent strength in the U.S. economy vis-a-vis the Euro Zone and across Asia and also given higher relative U.S. interest rates. It is my view that a bearish turn in the U.S. Dollar here would be another negative for U.S. stock prices (and maybe even the key "straw" that breaks the back of this incredible bull market).

U.S. Dollar Index (DXY) Daily Chart with Computer-generated Buy & Sell Signals