Saturday, January 30, 2016

Long - Term View On The U.S. Stock Market

Well, I was totally wrong in my last post on the U.S. stock market. Instead of going down it went strongly up. I am quite a good example of how difficult it is to predict a market move in the short - term.

Fortunately, January was a good month for those trying to profit on the descending stock market - for example, S&P 500 fell 5.1%.

In this post I want to look at the U.S. stock market in the longer time horizon.

Firstly, this market still looks like it is in its topping stage. While many other stock markets look to be in their bear market phases (or in a strong correction), the U.S. stock market stands firm:

Apart from Dow Jones Transportation, which looks like being in a strong correction or even in its bear market, other indices seem to be in their topping phases (which means that currently they are going nowhere).

However, in the long-term the markets do not paint a rosy picture.

1. Open interest in S&P 500 futures is going down:

The green arrow depicts the descending trend in open interest. When during the bull market phase the open interest goes down it means that less and less players are interested in participating in the game. And the basic stock market rule is that bull markets end with vanishing enthusiasm.

2. Less and less players are taking long positions in stocks (measured as a ratio of long positions / short positions held by big speculators):

3. More speculators are taking short positions in stocks:

As the chart shows, despite the ongoing bull market in stocks, since the middle of 2013 more and more speculators have been taking short positions.

4. The spread between junk bonds and U.S. treasuries is widening:

The chart shows the widening spread between junk bonds and 10-year treasuries. Please, note that before the last financial crisis (2007 - 2009) we encountered a similar pattern.
Since the second quarter of 2014 the spread has widened from 36 points to 50 points but the stock market seems not to be prone to that phenomenon. Not just yet...

Summing up, in the long-term the U.S. stock market does not look rosy for those believing in another year of price increases. However, in my opinion, there is no hurry to open short positions in stocks (unless you have very deep pockets). Topping processes are very tricky. What is more, the may last and last.

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