Market sentiment: extreme bullishness still [updated with volatility info]

Markets participants are still at this irrational exuberance state of mind, as shown by various metrics. This just cannot be good, specially after a 2.5 year rally that raised many indices by 80 to 200%, in wake of extreme economic strains and many sovereign defaults/bailouts.

See for yourself:
  1. No New Normal Next Year Seen by Strategists Predicting 11% Gain in S&P 500
  2. Hedge Funds Raise Commodity Gain Bets to 4-Year High
  3. Put Call Ratio: Everyone’s Betting On The Bull
  4. Volatility is back to April 2010 levels
Following, are quotes from the Bloomberg reports mentioned above.
Dec. 13 (Bloomberg) -- Rising profits and cash balances will push the Standard & Poor’s 500 Index to the biggest three- year advance since the 1990s, surpassing forecasts for below- average returns, strategists at Wall Street’s biggest banks say.

The benchmark gauge for American equities will rise 11 percent to 1,379 in 2011, bringing the increase since 2008 to 53 percent, the best return since 1997 to 2000, according to the average of 11 strategists in a Bloomberg News survey. Goldman Sachs Group Inc.’s David Kostin, the most accurate U.S. strategist this year, said sales growth will spur a 17 percent rally in the S&P 500 through the end of 2011.
Your new normal may not be quite so new,” said Barry Knapp, the New York-based head of equity strategy for Barclays Plc, who expects the S&P 500 will reach 1,420. “There’s nothing to worry about with earnings. We’ll get some margin expansion, and we’re still at a pretty good stage in the economic cycle. From my perspective, I’ve tried to think about all the risks. I just think the outlook is favorable, so favorable that I struggle to see how the equity market doesn’t perform well.”
Kostin, Goldman Sachs’ New York-based strategist who said last year the S&P 500 would end 2010 at 1,250, wrote in a note Dec. 6 that below-average bond yields help create a “superb backdrop” for equities. He expects the S&P 500 to finish 2011 at 1,450, the second most-bullish call among 11 firms surveyed. Total per-share earnings among companies in the index may rise to $94 next year, he said.

The profit forecast would be a record and compares with an average prediction of $92 a share in the Bloomberg News survey of strategists. The index trades at 13.5 times that estimate, compared with a median price-earnings ratio of 16.4 since 1956, according to data compiled by Bloomberg.
That suggests stocks are cheap relative to bonds and may spur investments by individuals, institutions and companies in 2011, Kostin said.

More than 70 percent of companies exceeded analysts’ profit estimates in the third quarter. That was the sixth straight period that many beat projections, the longest stretch since at least 1993, data compiled by Bloomberg show.

Jonathan Golub at UBS AG in New York expects a 6.8 percent rise to 1,325 in the S&P 500 through 2011, fueled by sales growth of as much as 7 percent. Next year looks “good, with a chance of great” for equities, he said in an interview. “You really get to good based on earnings alone. We’re entering into a self-sustained recovery,” and there’s “a very accommodative backdrop being provided by the Fed,” he said.

Dec. 13 (Bloomberg) -- Hedge funds and large speculators increased their bets on a commodity rally to the highest level since at least 2006 as copper and gold gained to records.

An index tracking speculative positions in 20 commodity futures in the U.S. advanced 8.4 percent from the week before to 1.54 million contracts as of Dec. 7, the highest level since at least February 2006, Commodity Futures Trading Commission data show. The gauge, compiled by Bloomberg, is derived by taking short positions, or bets on lower prices, from long positions.

Commodities tracked by the Thomson Reuters/Jefferies CRB Index advanced 11 percent this year, extending a 23 percent gain in 2009, on demand led by China and as investors bought raw materials as a store of value. Cotton soared 85 percent, silver 73 percent and arabica coffee 54 percent. Hedge funds and institutional investors will put more money in commodities next year as the world economy recovers, Barclays Capital said.

The current economic environment is clearly positive for risk assets like commodities,” Yingxi Yu, an analyst at Barclays Capital in Singapore, said today by phone. “Talk of a double-dip or a recession seems to be fading away.”

About 76 percent of respondents surveyed at a Barclays’s conference last week in New York predicted a bigger inflow into direct commodity investments next year. New investments this year were $50 billion, the London-based bank said.
Speculative long positions in New York-traded copper outnumbered shorts by 26,432 contracts in the week ended Dec. 7, a 25 percent increase from the week before, CFTC data show. Wheat speculators repositioned for a price increase, holding 8,488 net long positions, a reversal from 19,372 lots of net shorts a week before, the data show.

Hedge-fund investments in agricultural, precious metal, oil and copper derivatives totaled $160 billion this year, a record according to data compiled by ANZ. Of the current total, 75 percent of the bets are long positions, Pervan said.

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