Thursday, 9 February 2012
Risk appetite can increase a lot further but when Roubini is starting to get optimistic…
Several sentiment indicators signal an overbought equity market, but there are a lot of exceptions. One of the most important is the risk appetite index of Jonathan Wilmot of Credit Suisse (see chart via http://www.businessinsider.com/a-beautiful-chart-showing-3-decades-worth-of-panic-and-euphoria-2012-2#ixzz1lmPiHI7j). Already for decades that produces a reasonable picture how depressive investors are or how much they are in euphoria. At the moment the CS risk appetite index indicates that a big further improvement seems to be in the cards (when you have enough patience).
Since this week even Roubini provokes investors to become bullish for the short run (but after June the doom and gloom will retrun with a vengeance is his warning) many contrairy thinkers have had a heart attack. When even Roubini is bullish who is left to become bullish (and you need to convert bears to get new money in the markets)? Answer: nobody, so you have to sell.
That reminds me at January 1984. The most important Dutch guru in that time was Jacques Post of then ABN (not yet merged by AMRO or destroyed by Fortis). He had made excellent forecasts about the interest rates, that they should go to levels much higher than seen in everybody’s lifetime at the first and second oil crisis. Equities were something from the past and no longer suitable in the time of the coming social ideal state of Labour. He was a super bear and at long last after a huge bull market since August 1982 he became bullish in January 1984. In that time I just had bought my first equity call options. At that moment I had a big profit on those positions and I was persuaded by Post to become even more bullish: he had after all very good arguments that the markets should rise further. Of course the market went down almost immediately, about 15% (the phase DE in the four year cycle). In the end my calls became worthless. I had become a wiser man in investing, but I could also have been a few months of salary richer.