SMART MONEY CONSENSUS(Negative/Bull Market Indicator): A lot of hand wringing in adviser offices these days

July 30, 2014

It’s taken a few years of golden stock market returns, but it appears financial advisers are getting pretty uncomfortable with the stock market and where it could be going. The latest Bloomberg quarterly survey of investors, analysts, and traders who use Bloomberg terminals indicate that,

“Forty-seven percent of those surveyed said the equity market is close to unsustainable levels while 14 percent already saw a bubble, according to a quarterly poll of 562 investors, analysts and traders who are Bloomberg subscribers. Almost a third of respondents called the market for lower-rated corporate debt overheated and most said stock swings will increase within six months, the July 15-16 poll showed.”

The bubble effect appears to be more pronounced in the internet and social media stocks where 80 percent of respondents said they are in a bubble or pretty close to one (Don’t mention this to Janet Yellen and the Federal Reserve, who clearly stated that stocks, especially social media and tech stocks are not overpriced).

“Equities have been doing ridiculously well over the last two years,” Campbell Faulkner, a poll respondent and chief data analyst for OTC Global Holdings in Houston, said in a recent phone interview. “We’re not going to see a 25 percent decline, but a good eight to 10 percent correction would really clear out some of the valuations.”

So if the Smart Money People are not feeling good about stocks then we should all be heading to the exits? Relax says Doug Ramsey, chief investment officer at Leuthold Group LLC. Using the average of six metrics such as price to earnings and sales, market valuations today correspond to levels in 1996, according to a study published by Ramsey last month. That rally kept going until March 2000, when the S&P 500’s price-earnings ratio reached 30. The index lost almost half its value in two years during the subsequent bear market.

They’re all probably right. We just don’t know when the music will stop. Whenever the Consensus pounds the table on one sentiment, the other side tends to benefit. The thing about calling bubbles bursting is that they don’t announce a start time. They tend to catch people off guard. The dot com bubble in early 2000 and the sub prime/real estate bubble of 2007-08 caught all the Smart Money People.  In our current times, it seems now that everyone of all stripes; media, Smart Money People etc are aware that something bad is coming, perhaps scarred from the last experience they don’t want to get busted again. So with the Consensus growing more and more negative, it wouldn’t be a big surprise to see stocks bounce up in a last gasp of glory before popping back to earth.