Stock Market Enthusiasm Abounds - This is a Contrarian Indicator for Short Term Performance

Dec 11, 2020 | Nick Scholte


We shall see if a better entry point is offered in the weeks ahead. Should it occur, I'd use the opportunity to shift portfolios toward a modest overweight in equities. At present, portfolios remain neutral.

To my clients:

It was a mixed week for North American stock markets with the Canadian TSX finishing up 0.2%; the U.S. Dow Jones Index finishing down 0.6%; and the U.S. S&P 500 finishing down 1.0%.

Brief update, with four items on the agenda this week:

1) Weekly jobless claims badly missed estimates, coming in at a reported 853,00 new claims. This missed estimates by a very substantial 141,000 claims. It is noteworthy that at no point during the pandemic crisis have weekly claims fallen below the weekly record for peak claims during the 2008 financial crisis! Obviously the economy wide uncertainty combined with rolling (from region to region) business closures is causing havoc for employment. Sadly, this is disproportionately affecting those in the service industries who tend to be least able to afford layoffs. Given continued growth in new infections, employment conditions are not set to improve anytime soon. When the December employment report is released on January 8th, we just might see a negative print.

2)  As noted above, Covid-19 cases continue to climb. As do hospitalizations and deaths. With cold weather to remain for many more months; U.S. Thanksgiving exposures likely only beginning to be reflected in the numbers; and Christmas and New Year’s celebrations just weeks away, this trend doesn’t seem set to meaningfully improve anytime soon.

3) Nonetheless, vaccine rollouts are now underway. These will accelerate in the months ahead. Some significant improvement in our collectively “distanced” reality might well be expected by summer 2021.

4) Optimism abounds in the equity markets. The words of late 90’s era Federal Reserve Chairman Alan Greenspan ring in my ears – “irrational exuberance”. Do I think the current situation is as egregious as that particularly “exuberant” time? In a word, no. Myself, I’ve said the past few weeks that I’ll use market pullbacks as an opportunity to add additional equity (i.e. stock) to client portfolios. That said, the chatter on business news stations like CNBC seems to be tilting ever more (nearing universally) positive and enthusiastic. Likewise, broad investor optimism as gauged by three metrics here at RBC (AAII Bull-Bear ratio; CBOE Equity Put-Call ratio; and the JPM Global Equity Sentiment Indicator) are all stretched to highly optimistic levels (in the case of the CBOE Equity Put-Call ratio, it is at a near record reading). Somewhat counterintuitively, such unbridled optimism tends to be a negative indicator for markets. The thought being that if you are optimistic, you have likely already bought. High levels of optimism suggest buying has been exhausted, new buyers are few, and market weakness might ensue. This is by no means a perfect indicator, but it does provide context for my decision to await more material weakness in markets before further adding equity to client portfolios (the exception here being some recent new client relationships for which I did some limited buying this week to move these portfolios toward the positioning of my broader clientele).

That’s it for this week. All the best, and continue to stay safe,


Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
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