Why Look for an Outlier?

 | Nov 06, 2013 | 7:15 AM EST  | Comments
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EEM

,

db

At least the banks didn't break down more on Tuesday. They languished. In case you haven't been paying attention, it is not just our banks here in the U.S., but the European banks are down quite a bit as well.

Look at the chart of Deutsche Bank (DB). It is down 10% in a straight line, with nary an up day. No one seems to fuss over this either. Maybe because they have been so ingrained to buy every dip that down 10% is a reason to buy? In any event, DB has given up the entire October rally and is essentially back to where it was in May. The best news is that it has support at this uptrend line.

I see folks beginning to fret over emerging markets again, and rightfully so, but the chart of the iShares MSCI Emerging Markets ETF (EEM) still has 5% more to go before it gets back to the point where it has given up the October gains. Heck, that's outperformance vs. the European banks, right?

There has been a lot of discussion about whether or not the market is a bubble. I do not think it is a bubble. We have had two bubbles in the last 15 years. First was the tech bubble of 1999-2000 and the other was the housing bubble of 2006-2008. But just because we have had two bubbles doesn't mean we need to look for a bubble under every rock now.

Prior to the Crash of 1987, no one talked about crashes, but after 1987 folks called for crashes all the time. We become products of the market environment we live in. Soon, we'll probably have an entire generation of investors who believe bad earnings are a reason to buy stocks.

None of this means that we can't be at or near a market top. But not all tops are bubbles bursting and not all declines are crashes. Those are outliers, so why look for an outlier?

What should concern you more is that the Investors Intelligence readings now show 55.2% bulls. That is the highest reading since the May 22 high. The bears are now down to 15.6%, which is the lowest reading of bears since December 2009. Is the timing perfect? It is not, but I think you can see that once this survey gets under 20% bears, the chances of a correction go up and the upside becomes quite limited.

Let's move on to another chart using this survey. It is the spread between bulls and bears. Investors Intelligence believes that a spread over 30 is a time to get cautious. We are now ticks shy of 40. I only see us having gone over 40 once in the last five years, which was in the spring of 2011 and we know how that turned out, albeit months later.

The line on the chart represents 35%. Once up into this area we find the upside becomes limited on the S&P. In 2011 we did not go down right away, but what is curious is that this spread got up over 35% in early February 2011. The S&P might have had a bit more room to move but the Russell topped out on the first Friday of February that year, on a good employment report. We have an employment report on Friday of this week, don't we?

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