In our most recent Broyhill Letter, we suggest that increased caution is prudent given a number of leading indicators. The full letter is reproduced below, but given this week’s excitement over positive quarterly earnings reports, we thought we’d offer up some additional food for thought.
Last Friday was the first 90% Downside Day since February, sentiment gauges are as bullish as they’ve been since the “calm before the storm,”, the CBOE equity put/call ratio is at extremes last seen in August of 2000, stocks are the most overbought since the rally began in March 2009, we’ve gotten within spitting distance of “The Lehman Gap,” volatility is back to complacent levels, and by Jeffrey Saut’s count, last Thursday was session 34 in the “buying stampede” that began on February 26th (rarely do such skeins last more than 30 sessions).
Ned Davis recently referenced a study by Paul Montgomery, which concluded that the market tends to move in the direction of the “cover story” for about a month, but reverses and moves contrary to the cover about 80% of the time over the next year. Investors must remember that Magazine Covers are designed to sell magazines. Cover stories capture current consensus sentiment. Some recent examples of recent sentiment: Numbers Point to a Recovery; Relax, We’ll be Fine; Dow 11,000 Is Only The Beginning; Hope At Last; America’s Back; The Hot Hand; and our hands-down favorite, Double Dip? Hell, No! They say a picture’s worth a thousand words, so we encourage friends that might not be interested in reading our full letter, to at least take a good look at the picture below!