Active investment managers more bullish than ever

The average active manager is now leveraged long, according to NAAIM’s weekly survey:

Sustained bullishness is bearish, especially once the market starts to trend sideways. We don’t yet have that choppy sideways action on declining RSI that has been a death knell for rallies, but sooner or later it will emerge. If the market starts sidedays, this would complete the most bearish syndrome possible, though we already have a market that is overbought and overvalued, with overbullish sentiment and rising bond yields (John Hussman’s bearish syndrome that has nailed most major tops for decades).

In economic news, Q4′s negative GDP print supports the thesis that we entered a recession in the 2nd half of 2012, as leading indicators had been suggesting for months. It also comes right as the Citi Economic Surprise Index is again on the downward slope of its regular cycle, meaning surprises are more likely to be to the downside.

Hussman’s extreme risk syndrome present again

John Hussman does the best long-term statistical analysis of the broad equity market, bar none. He has identified a set of four conditions that has appeared at or just before significant tops in the stock market:

Overbought: S&P 500 within 3% of its upper Bollinger bands, at least 7% above its 52-week smoothing, and over 50% above its 4-year low

Overbullish: Investors Intelligence sentiment survey shows bulls above 52% and bears below 27%

Overvalued: Shiller P/E above 18 (it’s currently 23)

Rising yields: 10-year Treasury yields above their level of 6-months earlier.

This condition also appeared in 1929 (followed by a crash and 20 year bear market in real terms) and 1964 (stocks peaked in ’66 before going down 80% in real terms over the next 16 years). When stocks are overbought and overvalued, treasuries have fallen, and most investors are bullish, it is to your great advantage to eliminate market risk (sell your stocks or hedge them).

Gold:Platinum ratio dips under 1.0 for first time in 8 months.

Platinum has had a sharp rally in recent sessions, while gold has been only slightly higher, bringing the two heavier precious metals (specific gravity of 19.30 for Au and 21.45 for Pt) to parity for the first time since April. The ratio remains high, and has been elevated since gold left the more-industrial platinum in the dust in the summer of 2011:

This has been one of the longer periods of inversion in recent history. Selling gold and buying platinum in equal weights when the ratio is well over 1.0 has been a dependable money-maker for patient traders, as the ratio tends to revert to well under 1.0.