Stocks are off to a slow start in 2014. But that's just fine for Brad Lamensdorf. That's because as co-manager of Ranger Equity Bear ETF (HDGE), he's betting against the market. And according to him, there are four reasons to get short this historic rally.
Sentiment polls are too bullish and, in some case, are at 30-year extremes.
Lamensdorf says, "Sentiment polls have been very, very aggressively high for the last two months."
One indicator Lamensdorf cites is the Investors Intelligence Advisors Sentiment Survey of bulls and bears, which polls newsletter writers and money managers. "The bears actually hit 14.1%," says Lamensdorf, "which is a 30-year low."
"When too many of them get on one side of the market, usually expectations have been running too high," says Lamensdorf. "Everybody's expectations are the same, which are too bullish. And they tend to get disappointed."
Lamensdorf also believes that Ned Davis Research's Crowd Sentiment Poll is too optimistic for its own good. That measure shows a 73% bullish sentiment, Lamensdorf notes.
"Any time that sentiment gage is over 70%," says Lamensdorf, "you get a -16.6% annualized return in the S&P thereafter."
Insiders are selling aggressively.
Lamensdorf notes the Vickers' Insider Index, compiled by Argus Research Group, is showing a tremendous amount of insider selling activity.
"They devised an indicator that shows that the number of people that are selling – not necessarily the shares or the dollar amount – is getting to very dangerous level," says Lamensdorf. "If you go back and look at it over 20 years, the insider buy/sell ratio two [autumns] ago was at a one-to-one, which suggested the buying versus the selling in the insider category … was very bullish. Now, we're just in the reverse. We're in a very bearish position."
Margin debt is at an all-time high.
In his latest research, Lamensdorf points out that margins are high relative to overall market capitalization. They are currently above 2% of market cap. As well, mutual fund cash minus margin debt is lower than usual. "This type of speculation has historically been highest at market tops and lowest towards market bottoms," writes Lamensdorf.
Credit spreads are at 30-year lows.
The spread between corporate and government debt is at a 30-year low, explains Lamensdorf in his research report. He believes this indicates complacency as investors are assigning fairly low risk to corporate debt relative to just-about risk-free government bonds. In fact, he thinks it's too complacent given the spread between the two. "While our government has the power to print money to cover debts, corporations do not have such luxury," writes Lamensdorf. "Therefore, the inherent bankruptcy risk is much greater in the corporate arena."
As his ETF is short the equities market, it's down 26% in the past 12 months and 45% over the past two years. However, Lamensdorf believes short investors should take heart in this current climate. "I think this is one of the better short opportunities that you've had since 2000 and then 2007," he says. "This is the time where the wind has taken all of the poor names up and when they come down, it's going to be nasty."
To see Lamensdorf's full interview on Talking Numbers, watch the video above.
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