We have mentioned the astute work of James Montier previously, and suggested his Fear & Greed index should replace Citibank’s silly Euphoria measure in Barron’s Trader column.
Montier is a research analyst at
Dresdner Kleinwort in London, and is the author of Behavioural Finance: A User’s Guide. There is a good biographical sketch of Montier as an iconoclast/maverick here.
Recently, his F&G Index hit an all-time high. This was noted as yet more evidence that ” investors’ euphoria is truly out of control.” Of course, he wryly adds, “this warning is likely to be about as effective as yelling ‘cliff-edge’ to a herd of thundering lemmings.”
"The F&G index, compiled by Dresdner Kleinwort, is a risk-adjusted price momentum measure comparing global equities (as gauged by the MSCI World Index) to global bonds (represented by J.P. Morgan Chase’s index). The gauge has typically traded between +1 and -2 since its inception in 1986 — but was as low as -3 just four years ago, a sign that “the end of the world is nigh,” and therefore a time to buy stocks and sell bonds. But as the market has turned upward in recent years, the index has shot up above +2 into the “irrational exuberance” area, a sign to sell equities and buy bonds.
Still, he suggests that “the prudent investor should be shipping out beta and junk, and buying quality defensives.” Even better, Mr. Montier says, “holding cash seems like a good idea,” noting that U.S. mutual funds currently have a mere 3% to 4% in cash. To paraphrase Warren Buffett, he says, “holding cash is painful, but not as painful as doing something stupid.”
Note that this tends to be an early warning system, and is not a precise (hours, days) timing measure. Think of it as a 90 day warning of trouble potenitally heading your way.
Fear and Greed In Markets
WSJ, February 22, 2007, 3:26 pm
get his market back on track, bring out abbey and the bags
In March 2000 I sold all my shares except one share of baby Berk and $1000 each of two tech funds (a dumb sentimental mistake which I still hold). Today, I sold everything again except one share of Baby Berk and my two still pathetic tech funds. Whatever warning system I use, it just went off for the second time in twenty years.
In 2000, the key was some dweeb on the radio saying a tech stock should be at some outrageous value based on, well, cause he thought that was what it should be. It was a very clear, easily understood moment (“hey, I’m in a lunatic asylum, I want out NOW!”). This one isn’t so clear to me, it’s more of a feeling that has been building that somehow this whole last year or two has been built on the beach and the seventh wave is approaching, I just haven’t made out exactly where that wave is. I don’t know what the outlier is that is going to make things go tilt, but I just think it is here and I can’t put my finger on it, but put me down in concurrence with Montier’s index.
Anyways, my best to all you stock market bulls (and to all you real estate bears, yes, I still have my three houses, ain’t selling those), see you again in a few years.
Forefront of my mind is how much all that put buying the last 1-2 weeks is going to buoy this market.
where’s maggie maher?
writing her addendum chapters to “Bull” i quess. quite a bit more to report. definitely another book’s worth of material to add.
One of the many things I’ve learned from my many years of being bitch-slapped by the market is that the bounce in the Chinese market will be just as if not more telling than the actual correction itself.
In other words, will this cause widespread reevaluation of risk or is it just run of the mill panic which is always temporary. Something you can’t discern until the buying that arrives after the sellling.
When I pull up a chart of the Shanghai Index for the past year, this 8% correction doesn’t look as big as it sounds. The index is still above it’s low set earlier in the month and even is still up for the year.
Does anyone here actually follow individual stocks in the Chinese market and could tell us if the carnage is widespread and actually hitting all the Chinese “daytraders” even harder?
Barry, little turbulence in the air, and my radio “konked out”. Any furtha reports from “The thrilla in Manilla”, round and whose winning?
Just a suggestion… but when Kudlow calls I’d just say no.
Bit of a drop today and the world as we know it is ending stuff has already started. Accusations are being thrown, Cramer is already talking about a rate cut and Cody Willard has called it a crash, I don’t subscribe to that site by the way.
CNBC will no doubt have a slot devoted to the unfolding drama in the markets with breathless presenters explaining how its 2007 and shit does not happen and we may all get out of this alive if we just don’t sell. I don’t watch that channel by the way.
These guys live in a dream world, and this is from someone who is long the market.
Interesting chart. This is great if you’re buying the global basket…but the US market has dramatically underperformed, so it may not be reflecting the true “sentiment” here. I simply am NOT seeing joe sixpack levereraged into this market, buying penny stocks…far from it. I’d call the sentiment – Apathy squared.
Well, you guys wanted it and you’re going to get it. 2% correction today in the Naz is all but guaranteed. I would bet that we will end down around 1.75 – 1.9% on the Dow and S&P. Guess we would need an actual 2% decline in the Dow and S&P for the bears to be happy – right?
When do I start spending some of my cash?
Put Call continues to be off the charts. It has averaged ~ 1.6 all day…with a high of 1.91. Also note the specialists are buying calls!
I want to watch the next few days to see if the rally attempts fail. If this occurs I think we may see a similar 5-8% correction like the one last May-June.
I don’t have access to a TV, but can anyone tell me if CNBC is running a ticker showing how much lower the Dow is from the record?
Lewis, you have amazing timing…
Any minute now we should see some politician come out and blame it all on “Hollywood”
Dr. Hussman is looking smarter today.
“can anyone tell me if CNBC is running a ticker showing how much lower the Dow is from the record?”
Am I right in assuming there is no publicly-available link to the Fear & Greed index?? I’ve tried to navigate back through some of your links but haven’t found a way to see where the index stands in real time.
Alot of things I’ve never seen before:
TRIN is off the charts.
One of my accounts, Interactive Brokers, is not letting me open ANY new positions, saying account valuations may be incorrect. I have plenty cash so things must be going apeshit in other peoples’ accounts.
To Erik: Where’s Maggie Maher?
Actually, she is being mercilessly bashed and ridiculed by the neo-con right-wing-nut-job propaganda machine.
Her “sin” has been to dare suggesting, in a remarkable book, (well, remarkable for those who can think for themselves…a rare occurrence these days) that a free-market philosophy doesn’t square perfectly well (that is some understatement) with the reality of the health care universe. She compounded her sin by having the unbelievable nerve to describe and document her findings, adding to the workload of the poor trolls and spin doctors.
Pity, ain’t it?
P.S. BTW, I’m a big fan of her. :-)