Market Skepticism Is A Good Thing!

1.) SKEPTICISM – Sir John Templeton is credited with saying that…“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” He is also credited with saying, “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” When was maximum pessimism likely for equities? Like I've written, probably March when VIX was trading at 35+. When was maximum pessimism for oil? Probably this month – April – when West Texas Intermediate crude (WTI) hit $118+ and reversed. So, where are markets now? Skepticism.

2.) FLOWS – Money flow analysis is valuable in today’s algorithm, systematic-driven markets. Goldman Sachs provides data via their Prime Book to help see what the systematic community (CTAs = movers of BIG money) is doing. Right now, they estimate that CTAs bought $19 billion of US equities last week. On top of that, over the next week, buy estimates are some of the largest on record. CTAs are likely buyers of $43.5bn US equities even if the market is flat over the next week. Their data suggests that this group is even buyers if markets are down.

3.) COMBO – It’s fairly rare to see a decline in the Price/Earnings ratio of the S&P 500 of -18% or more while also seeing forward earnings growth high and accelerating. Yet currently, this is the place we find ourselves. No wonder the CTAs are big buyers in an up, flat, or even down tape over the next week!