While optimism and bullishness get even more extreme than it was before... Jeremy Grantham publishes his latest quarterly letter, which under the cover of a rant against the Fed, Greenspan and Bernanke, shows extreme bullishness while claiming bearishness...
The Call/Put ratio is declining to the lowest levels of several years, and is now more than 2 standard deviations from its mean (read: quite extreme divergence).
The letter has been covered by several other bloggers, which I will ask you to refer to:
And, briefly, let me give you my reasons why this rally running through next fall is not at all out of the question. In October we enter the third year of the Presidential Cycle, the year every Fed except, of course, Volcker’s, helped the incumbent administrations get re-elected. Since 1932, there has never been a serious decline in Year 3. Never! Even the unexpected Korean War caused only a 2% decline. Even when Greenspan ran amok and over-stimulated the first two years instead of cooling the system down – which he did twice, having not suffered enough the first time – he stimulated Year 3 as well. The result was that we entered Year 3 in October 1998 and Year 3 in October 2006 with horribly overpriced markets, and still the market went up, and by a lot. The overpricing in October 1998, by the way, was so bad that our 10-year forecast was down to -1.1%; in October 2006, by a nerve- wracking coincidence, our 7-year forecast was -1.0%. If the market is 1320 by this coming October (up 10% from today), our 7-year forecast will again be -1.0%. (Please hum the Jaws theme here.) Do not think for a second that a very stimulated market will go down in Year 3 just because it’s overpriced ... even badly overpriced. So far it has had 19 tries to go down since 1932 and has never pulled it off. We can, of course, hope that this time will be exceptional. Even in the best of times, though, overpricing is only a mild downward pull. Its virtue is that it never quits. Eventually it wears the market back down to fair value.
The general conclusion is that the line of least resistance is a market move in the next 18 months or so back to the old highs, say, 1500 to 1600 on the S&P, accompanied by an equivalent gain in most risk measures, followed once again by a very dangerous break.
Conclusion for the preceding quote: does anybody believe anymore that the market can go down at this point? Certainly not our "bearish" friend, Jeremy Grantham.
Even worse: He give probabilities to a few of economic outcomes (see capture below):
- Strong economy recovery: 30%
- No real market shocks etc. etc. until Oct 2011: 49%
- Markets fall: 21%
WOW! He gives 50% more likelihood to a strong recovery than for a market fall. I'm guessing his Keynesian backgrounds are showing up here...
All in all, I still think (and hope for) a top at these levels. Fingers crossed, seems like we're close...