AN UNORTHODOX LONG-TERM INDICATOR IS ABOUT TO SCREAM BUY
The combined put/call ratio is a useful tool to measure sentiment, yielding contrarian driven results that are beneficial to an investor more often than not. There are other ways to use the put/call, however, beyond your simple when the put/call moves up to X level then the market should be bought as pessimism is excessive and when it moves down to X it should be sold as optimism is excessive. Some pretty impressive results can be had from examining two very long-term moving averages of the put/call ratio, in this case the 260 and 600 day simple moving average, with the intent of studying what happens to the markets when these moving average cross. Think about what it means for just a second when these two long-term moving averages cross. It's a pretty important indicator of comfort or discomfort with a market, not in a contrarian sense, in that comfort equates to complacency. But, rather, in a very real sense, as in this case it equates to comfort that has evolved from some very pessimistic conditions prior. With that frame of thinking in mind, when the 260 day moving average crosses below the 600 day moving average, it represents capital becoming comfortable moving back into the markets following a pronounced period of pessimism. The 260 day moving average is above the 600 day moving average exclusively during recessions and panics. It represents an investor class that basically hates the market. The 260 day moving average going back below the 600 day moving average represents an investor class that is warming up to the market again, with capital moving into risk assets. Here's a look at what happens to the S&P 500 12 months following capital becoming comfortable with the market as reflected by the put/call ratio: click chart to enlarge The most impressive part of this study is not the average gain of 16.87% in the 12 months following the sentiment shift, but rather the fact that the maximum drawdown once the cross takes place averages 2.2% when the signal is taken at month end once triggered. Essentially, once this sentiment shift takes place, the markets simply take off, without much in the way of looking back over the next 12 months. A slice of apple pie amidst the chronic pessimism and indecision investors face at this juncture....
SEPTEMBER CLIENT LETTER: LET’S GET NORMAL; A WICKED GAME TO PLAY; BUY COMPLEXITY, SELL SIMPLICITY
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. The stock market is a giant distraction from the business of investing. ---- John Bogle Let's Get Normal The Delivering Alpha Conference took place in September. Delivering Alpha, for those who are not familiar, is basically a conference where high level fund managers take the stage for an interview where they discuss opinions about the markets, economy etc. Here is an excerpt from an interview with Marc Lasry of Avenue Capital worth noting: Caruso-Cabrera: We were chatting and we had our conference call beforehand. And you made the point in saying that a while ago you gave up on quarterly redemptions. If you want to give me your money, you have to give it to me for three years. No more hedge fund. Why? Avenue Capital Group CEO Marc Lasry: Because I think it's gotten extremely difficult to invest on a quarterly basis. I think before, when you weren't in a zero-rate environment, a zero-interest environment, it was actually easier. But now, you actually need the luxury of time. And because sometimes things will go down, so you need to invest over a sort of two or three year period. Or not have people who get nervous who automatically want their capital. And I didn't think we could generate the returns for people if we did that. So mainly we just went to our investors and said we're going to shift anybody who is here to lock up to about three years. And whoever doesn't want to do that, you can leave, and about 75 percent of the money stayed and 25 percent left. In recent years, it has become of increased importance to recognize that the runway towards an investor recognizing value in a stock and the market recognizing that same value has lengthened substantially. The markets as a whole have become reluctant to assign value to uncertain situations. Given that we just so happen to dwell in the realm of murkiness and uncertainty, this dynamic will certainly effect the pattern of returns until the dynamic changes or our positions move into more certain fundamental positions that will lead to a sudden rush of value creation. What we are truly experiencing in the current zero yield market environment is an expression of emotion rather than an expression of intellectual understanding. Investors globally are telling us that they are too fearful, skeptical and indelibly scarred to put capital at risk. This is an extreme emotional reaction to unprecedented action by global central bankers caused by a once in...