If there was ever a stock market indicator that makes us worry, it is when the general public gets very bullish. Nothing seems to yell “stock market peak” like a record setting sentiment number. A new sentiment tracker from Qontigo called ROOF (risk-on/risk-off) just registered a score of 4.8, which is in the 95th percentile historically. The ROOF score hit a low on October 2nd and has been rising since then.
FINSUM: Whenever we see readings like this it just always feels as though a correction is near. The reason why is that since people’s expectations are high, they are easily let down and get fearful/redemptive.
A huge institutional investor is poised to make a fortune if markets plunge. The biggest hedge fund in the world—Ray Dalio’s Bridgewater—has reportedly placed a $1 bn+ bet that stocks will tumble. Using Goldman Sachs and Morgan Stanley, the firm has been building up the bearish position for months. The bet wagers that stocks will fall sharply by March and will pay off if either the S&P 500 or the Euro Stoxx 50 moves lower. Bridgewater reportedly paid $1.5 bn for the options contracts, roughly 1% of their AUM.
FINSUM: This is a huge bet. Normally you could argue that this might just be a hedge, but the size of the position makes it seem much more like a gamble than a hedge.
It is not going to be a huge crash, but Morgan Stanley thinks US stocks will struggle in 2020. The bank thinks the US is clearly “late-cycle” and that its growth will wane from 2.3% to 1.8% next year. It believes the Dollar will weaken and stocks will struggle. The bank thinks most of the benefits of the Fed’s rate cuts have already been priced into the market. “In 2020, the economy will grow more slowly as the bulk of the positive lift from lower interest rates will have been absorbed and households balance higher income with higher prices from tariff”, says Morgan Stanley. The bank says emerging markets are likely to outperform.
FINSUM: Of all the forecasts we have seen lately, this one seems the most realistic. We don’t see a big bust coming, but a plateau seems very believable.
There has been a large segment of money managers and investors that have taken a bullish stance against Treasuries. With rates rising and the economy performing well, it stood to reason that yields would keep on rising. However, after a couple of months of brutal stock volatility and worries over a trade war and growth, investors are finally shedding those bearish short positions. The stance was one of the most popular of the year, but the volume of bearish positions has shrunk by two-thirds since from the record it reached in late September.
FINSUM: The ten-year yield now looks more likely to fall than rise given the longer-term economic outlook and trouble in stocks.
Morgan Stanley has just published a list investors should probably pay attention to. The bank’s research has chosen ten stocks which it says may tank. It is unusual for bank analysts to have negative views of stocks, but when they do, it is worth listening to. Without further ado, the list is: Abercrombie & Fitch, Avis Budget Group, Bed, Bath & Beyond, EQT, FitBit, Hertz Global Holdings, Juniper Networks, MSG Networks, Seaspan, and Tenneco.
FINSUM: The most interesting ones for us are the car rental companies (Hertz and Avis). They say ride-sharing is a risk, as is a decline in used car values. We agree with the former, but we think the latter is off base because as new car buying slows (as does the economy), used car sales will pick up.