Tuesday, February 14, 2017

Passive Investing Wave

The money is going into passive investments.  The index-based ETFs.  It only took 7 years of underperformance by active managers for people to finally dump their mediocre fund managers for something that at least keeps up with the averages.  It doesn't signal a top for the market, or a bottom for active managers.  But it does signal that we are getting late into the run higher for the equities.  Over the long run, passive funds will always outperform active funds.  The transaction costs by themselves make it nearly impossible for active funds as a whole to beat passive funds.  But most investors are illogical, how else can you explain so much money being invested in hedge funds, which are basically wealth accumulation vehicles for the hedge fund manager.

The popularity of these ETFs make it much easier to sell, and the selling power is much more focused.  We could see another day like August 24, 2015, when the bids just disappeared, some ETFs didn't even open, and you went locked limit down in the S&P futures.  The derisking is going to be violent, because instead of having to do the cumbersome fund selling, you can just go online and push sell to get rid of your ETFs.  The panic will be tremendous when we finally do top out and correct.  The flash crash and August 24, 2015 are symptoms of quicker trigger fingers when the crap hits the fan.  With so much overvaluation, there is very little value support below.  You will not attract many fundamental buyers unless you get closer to 1800 on the S&P.  

Some may think it is looking way ahead talking about flash crashes and lock limit down S&P futures, but it is something that is very much possible in the second half of the year.  The markets have gotten so overvalued that you are setting up one of these quick wipeout scenarios.  And much of that will be led by panicking investors dumping their ETFs.  

We closed at another all time high yesterday.  The spring is getting coiled and potential energy for a new bear market is building.  Give it time.  Watch the VIX, and when you start seeing it rise along with the market, then you know the end is near.

14 comments:

shzhning said...

Hi did you go long ES at all for the past few days?

Anonymous said...

Im saying it right here. Market is gonna repeat itself like it did in 99 00? And trump is gonna be the new bush circa 2001.

a/c. 21214 said...

Beware the Ides of March.

Copper (/HG) is telling us a story.

I am enjoying your blog, Market Owl.

Market Owl said...

I agree, this is looking like a blowoff top, similar to 2007, and a bit like 2000. It is going to get nasty on the other side.

Anonymous said...

Early stages of a blowoff top. I think nasdaq hits 6500 minimum. Amzn 1000 tsla 450 aapl 170. The run is gonna come fast and furious and within a short time frame. This is not a top and the actual top is gonna take us 20 percent higher later this year.

Anonymous said...

IOW this is just october 1999 were at right now. Anyone here old enough to remember the good old days. Those who dont learn from history are bound to...

Anonymous said...

Who feel me on that?

Market Owl said...

I think we probably top in May/June. This move is on its last legs, it is going to be a doozy on the other side of the mountain. Bear market is right around the corner.

Anonymous said...

There need to be a sign of a slowdown in the economy or a drastic change in the interest rate environment like greenspan in 2000?

Im thinking is such changes are present they wont materialize till way into the 2H even end of this year or even beginning of next year.

You feel me?

Market Owl said...

No way this house of cards going to last into the end of year, Fed rate hike or no rate hike. Stocks so overvalued, and economic growth will be slow regardless of Trump. 8 year old bull market, with this kind of overoptimism on Trump plans. Investors are chasing a big fat bubble.

Anonymous said...

Are we as overextended as back in 2000? That what I was thinking. You are right one of the longest bulls ever. And people know that but to defy logic and kill the bears shouldnt the market have like a six sigma move up to remove any doubters of this bull then let the crash commence?

Anonymous said...

My thought was for the market to have a move up like in end of 99 beginning of 2000 it would take till the end of the year because there are so many skeptics out there. But to your point it is possible to make such a move by may or june. Thats how long it took 18 years ago. It happened within a few months

Market Owl said...

This market is not like 1999 or 2000. Back then, economy was strong, investors much more optimistic, and moves were much quicker and volatility much higher. You may have forgotten, but VIX was trading well above 20 even as the market was rising. I see more similarities with 2007 and 2015 move than the 2000 move here.

This is hedge funds chasing this market higher, they are the marginal buyers these days, not retail. They can't fall too far behind the averages, so they have to buy even if they don't really want to.

a/c. 21214 said...

8:00 A.M.: /HG story, per above, played out and 2/28-3/1 shenanigans filled this A.M. /ES, /YM to firm today ahead of NFP for next measured move up (Intermediate Head?), else 20600 below on failure? Several panic-level $TICK tests yesterday (as on... 1/23, 2/2, 2/28).