Contrarian Alert: Mutual Funds Are Buying This Rally – Should You Sell?

Most licensed and bonded professionals are considered authorities in their field. Usually you do as they say. Almost the opposite is true for financial pros, mutual fund managers. It often pays to do the opposite of mutual fund managers.

I’m not a craftsman, so if a pipe springs a leak I call a plumber. To get the job done right you call a pro. Unfortunately, the same principle doesn’t always apply to investing.

Often the opinions of the investment pros – mutual fund managers – work better as a contrarian indicator than an actual authority. That’s what makes the recent mutual fund manager survey interesting.
Each week the National Association of Active Investment Managers (NAAIM) surveys money managers to see how aggressively they are positioned, long or short.
The positions can range from leveraged bullish (200% net long) to leveraged bearish (200% net short).
The average mutual fund manager is currently 87.5% net long, that means that for every $100 under management, $87.5 are invested in stocks.
That’s not an all-time high, but as the middle portion of the chart below shows, fund managers are not often that bullish.
The chart plots the S&P 500 (SNP: ^GSPC) against two facets of the NAAIM survey. The vertical red lines highlight the correlation between extreme readings and the S&P 500 (NYSEArca: IVV).
Another interesting data point is the ‘last bear standing’ portion of the NAAIM survey. The most bearish manager polled, on average, is leveraged short (negative 110%). The most bearish manager right now is 15% long.
Rare as those bullish readings are, they are not as bearish for the S&P 500 (NYSEArca: SPY) as we’d expect from a contrarian sentiment indicator.
Some extremes led to corrections (October 2007, April 2010, February 2011), but in other instances (January 2007, September 2009, December 2010, January 2013) stocks just kept on trucking. Although on most occasions eventual corrections erased all or most of the gains accrued since the extremes were registered.
Another indicator that provides a sneak peek at what mutual fund managers are thinking are mutual fund cash levels. Just like a fire needs wood to burn, stocks need cash to rally.
How much cash is left to drive stock prices up further?
The detailed mutual fund cash level analysis featured here provides interesting inside with a twist.

Mutual Fund Managers: So Close Yet So Far Away From Record Bullishness

For much of the post-2009 QE bull market mutual fund cash levels have been cited as the reason why stocks can’t move any higher. Rising stocks have silenced this notion. Here is another look at near record fund manager bullishness and what it means today.

No doubt there are some brilliant mutual fund managers, but only a few of them consistently beat broad market indexes like the S&P 500.

The fund manager profession may consider this an insult, but viewed as a group they are often more valuable as contrarian indicators.
Mutual Fund Cash Levels
Just like a fire needs wood to burn, stocks need available cash to rally. Mutual fund cash levels are one gauge of ‘sideline money’ left to bid up price.
Historically, fund managers are close to fully invested near market highs and out of the market near market lows.
The chart below illustrates just that. Mutual funds (blue columns) were almost fully invested before the S&P 500 (SNP: ^GSPC) went into meltdown mode and held record cash positions when the S&P 500 (NYSEArca: SPY) took off in 2009.
In other words, investors were fully exposed to losses and held much cash at a time when they would have wanted to own stocks.
But enough beating up poor fund managers, let”s take a look at current mutual fund cash levels and the implication for stocks going forward.
As of June, mutual funds had 3.8% of funds invested in cash. This is somewhat near the all-time low of 3.3% in December 2012.
However, considering that the S&P 500 is trading higher than in December 2012 or any time in 2007, the current mutual fund cash level is actually not that alarming.
The ‘Twist’
Another fact to consider is interest rates. In 2007 the 10-year Treasury Note yielded up to 5% while the 10-year yield was below 2% for much of 2013 (black line at bottom of chart).
In other words, the incentive to hold cash in 2007 was much higher than in 2013.
The red line at the bottom of the chart adjusts the mutual fund cash level for interest rates (mutual fund cash level : 10-year yield).
Based strictly on a balanced assessment of mutual fund cash levels, managers are not yet uber-bullish.
But mutual fund cash levels aren’t the only way to gauge what the pros are doing.
A little-known indicator provides a sneak peak at what mutual fund managers are thinking (and doing) and what it means for stocks going forward. Based on this indicator, fund managers are really buying into this rally. Is this a contrarian alert?
The article ‘Contrarian Alert: Mutual Fund Managers Are Buying This Rally – Should You Sell?’ features a detailed analysis of this little-known indicator.

Stock Buying Climaxes Soar Again

Investors Intelligence reports 336 buying climaxes for the week ending July 26. This is the fourth highest reading of the year. While there is a short-term message, the big picture message of recent climaxes looks more important.

Investors Intelligence (II) reported 336 buying climaxes for last week.

Buying climaxes take place when stocks make a 12-month high, but close the week with a loss. They are a sign of distribution and suggest that stocks are moving from strong hands (long-term investors) to weak ones.
This sounds bearish, but what does it really mean for stocks?
The image below superimposes the S&P 500 on top of II’s buying/selling climax data.
Last week’s buying climaxes almost reached levels seen in March and April, which coincided with corrections of 30 – 70 S&P 500 (NYSEArca: SPY) points. None of the recent spikes in buying climaxes caused lasting damage.
More reliable than buying climaxes were the spike in selling climaxes reported on July 1. The last week of June saw 206 selling climaxes, the highest reading in at least a year. This was one of the clues that stocks may rally stronger than expected.
Viewed as part of the big picture, the cluster of buying climaxes since March 2013 is noteworthy. After all, this QE-bull market is now 52-month old. The average length of a bull market (according to Lowry’s) is 39 months.
This may be early telltale signs of a developing market top. The majority of my supply/demand and divergence-monitoring indicators still suggest new highs ahead, but they should be enjoyed with caution.
Actual target levels for a possibly significant market high are revealed in the Profit Radar Report.
Simon Maierhofer is the publisher of the Profit Radar Report.
Follow Simon on Twitter @ iSPYETF.

How Big is CAT’s Effect on Stocks and Economy?

Caterpillar’s (CAT) earnings disappointed, but is this the only reason why CAT has become the number one target of a famed hedge fund short seller? Could this CAT wreak havoc on the ‘dogs of the Dow?’ Here is how CAT affects the Dow Jones.

This CAT is bad news for the ‘Dogs of the Dow’ and has become the number one short target of a famed hedge fund investor.

Global construction equipment powerhouse Caterpillar (NYSE: CAT) announced thoroughly disappointing second-quarter earnings on Wednesday.
Revenue dropped 15.8% to 14.63 billion and earnings slid 43% to $960 million. Perhaps more importantly, earnings and revenue guidance was lowered as well.
Caterpillar’s global dealers have been selling some of their inventory, but largely refrain from restocking CAT equipment due to lacking demand.
CAT already implemented factory shutdowns, rolling layoffs, and expense cutting programs and will continue to do so for the remainder of 2013.
A company like CAT, that operates in an economically sensitive sector and has tentacles spread out over the entire globe, provides an interesting gauge of the global economy.
Here’s a thumbnail sketch of why many are worried about CAT’s message.
Many of CAT’s customers are in the construction and mining sector. Take a look at ETFs like the Market Vectors Gold Miners ETF (NYSEArca: GDX) and you know why mining companies aren’t in a position to chauffeur mined metals in the latest model dump truck.
Many metals, such as copper, iron or silver, are used in construction or technology. Slowing demand for metals cautions of a slowing economy. Dwindling demand for construction equipment has the same effect.
Just last week, famed short-seller Jim Chanos, founder of Kynikos Associates, picked CAT as his top choice to short for a number of reasons, such as deflating Chinese real estate bubble, slowing cycles and some accounting troubles.
CAT And The Dow
Apparently there are plenty of reasons to be bearish on CAT, but how does this affect other stocks?
CAT accounts for 4.22% of the Dow Jones Industrials Average (DJI: ^DJI) and Dow Diamonds ETF (NYSEArca: DIA) and is the ninth biggest component.
As the chart below shows, there’s quite some directional harmony between CAT and the Dow Jones Industrial Average.
In fact, from 2005 – 2011 CAT and the DOW carved out major highs and lows in pretty much the same week every time.
This changed in early 2012 when CAT started heading south while the Dow kept climbing higher.
This phenomenon is not exclusive to CAT. We’ve seen a very similar lag with copper prices
(related article: Indicator Exposed: ‘Dr. Copper’ – More Quack Than Doctor)
What does this mean? There may be a very complicated and intricate explanation for this, but the most likely one is that the economy is weak, but the Fed and other central banks are strong.
Oh yes, and stocks might be in trouble … eventually.
Simon Maierhofer is the publisher of the Profit Radar Report.
Follow Simon on Twitter @ iSPYETF

ETF SPY: Will XLK Ride Apple’s Coattail?

Apple has broken above resistance courtesy of a post-earnings gap up open. This is a bullish development, but caution is warranted as there’ve been at least 7 dead cat bounces in recent months.

The after hours reaction to Apple’s earnings announcement was positive. Shares were up nearly 5% as AAPL beat earnings and sold more iPhones than expected. The biggest fly in the ointment was that margins are shrinking, a problem all companies face when they ‘grow up.’

Apple accounts for 11.67% of the Nasdaq-100 (Nasdaq: QQQ) and 13.15% of the Technology Select Sector SPDR (NYSEArca: XLK).
Although Apple’s effect on the technology sector is not as suffocating as it was at $700 a share, AAPL is still the single biggest component of QQQ and XLK.
Interestingly, XLK has thus far been unable to beat its May high, but QQQ did. This lag is not due to Apple, as Apple rallied 11.8% from June 24 – July 17, XLK only 7.51%.
XLK Technical Picture
The stock market in general is kind of stuck between a rock and a hard place. A correction is due, but any dip is likely to be bought again. This means the up side is limited, but so is the down side.
The XLK chart below shows basic support and resistance (solid red and green line).
A close below the July 19 low at 31.37 would be a failed percentR low-risk entry, essentially a sell signal.
As long as prices stay above 31.37, the open chart gap (purple bar) should be filled. Even a move to the red trend line is possible.
AAPL Technical Analysis
If you want a shot of nostalgia, you’ll enjoy this article from August 22, 2012:
This article was written at a time when analysts were ‘bidding’ for the highest Apple price targets. Above 1,000 was pretty much the minimum bet.
Apple then dropped from 705 to 385 and has been bouncing aimlessly ever since.
Today AAPL was able to clear short-term resistance at 437. Next trend line resistance is at 448.
There have been many false fits and starts for Apple since the April low at 385 and there’s no telling if this bounce will stick. Similar breakaway gaps (gray circles) were retraced shortly thereafter, so it’s prudent to wait for more confirmation.
Simon Maierhofer is the publisher of the Profit Radar Report.
You can follow him on Twitter @ iSPYETF.

Has Gold Bottomed?

Gold’s second quarter will enter the history books as one of the biggest declines ever. Until yesterday, gold’s third quarter performance has been boring at best. Monday’s one day pop begs the ‘real rally or bull trap’ question.

Gold is special for many reasons. For example, a single ounce of gold can be stretched into a 5-mile long thread or beaten out into a 300-square foot sheet.

Gold is also non-toxic. In fact, you may find gold metal flakes in exotic foods or unusual Swiss liquor. I still have an old bottle of GoldSchlager schnapps in my bar.
This strong gold flake liquor may help drown the pain of this year’s gold performance, but other than that investors don’t care much about gold’s taste or pliability.
Investors buy gold as protection. What kind of protection? That’s a fair question. I guess unless you were looking to buy protection against making money, gold has been little more than an expensive placebo (ask John Paulson).
When central banks around the world started to quantitatively ease economies out of the ‘Great Recession,’ gold was considered an inflation hedge.
Quantitative easing (or QE) continues, but gold is trading 30% below its 2011 high.
This line of fundamental reasoning doesn’t make sense, but many investors still base their gold buying/selling decisions on a similar rationale.
Yesterday gold saw the biggest one-day spike of the year. Why? Perhaps you can make sense of this, I can’t.
Abe’s (Shinzo Abe, Japanese Prime Minister) party and its coalition partner won a majority of upper house seats in the weekend vote, boosting his opportunities to stimulate the economy.” – San Francisco Chronicle
Nutshell explanation: More easy money will mean higher gold prices.
If plenty of easy money over the last two years coincided with the steepest gold decline in decades, why would it propel prices higher now?
Has Gold Bottomed?
To answer the question that really counts – has gold bottomed? – I rely on technical analysis.
Technical analysis is not always correct (nothing ever is), but it got us out of gold when it traded around 1,800 and to this day I receive thank you e-mails from subscribers.
(Original August 21 and 24, 2011 subscriber update: “I don’t know how much higher gold will spike but I’m pretty sure it will melt down faster than its melting up. At some point investors will have to sell holdings to pay off debt or answer margin calls. The most profitable asset is sold first. Gold has been the best performing asset for a decade and a liquidity crunch could produce sellers en masse.”)
The chart below plots gold prices against the S&P 500. The resulting chart illustrates two key points:
  1. The S&P 500 and gold have been moving in the opposite direction since late 2011.
  2. The basic technical picture for gold.

Here’s what’s worth noting from a gold technical analysis point of view:
  • The June low occurred against green trend line support.
  • Monday’s bounce hoisted prices above resistance at 1,300.
  • Gold is bouncing against next resistance around 1,335.
After gold’s second quarter meltdown prices had to bounce. Until yesterday, it lacked the escape velocity needed to break above resistance (at 1,300), and still another move above 1,335 is needed to unlock higher price targets.
Since there was no bullish RSI divergence at the June low (not shown on chart), I’ve been hesitant to embrace this rally. In fact, I would prefer a new low.
But the market cares little about what I like. So, as per the July 10 Profit Radar Report, I recommended to take partial long positions in the SPDR Gold Shares (NYSEArca: GLD), or iShares Gold Trust (NYSEArca: IAU), and iShares Silver Trust (NYSEArca: SLV).
Thus far the positions have done well and we’ve locked in some profits already and increased our stop-loss to guarantee a winning trade.
Gold (and silver) will have to move higher to validate employing more capital on the long side.

Indicator Exposed: ‘Dr. Copper’ is More Quack Than Doctor

Myth or fact? Because of its use in many industry sectors, copper is a reliable indicator for the global economy and the stock market. The rationale makes sense, that’s why copper is said to have a Ph.D. in economics, but two charts oust copper as a quack.

Copper is said to be the only asset class to have a Ph.D. in economics because of its alleged ability to predict turning points in the global economy and stock market.

Here’s a quick sneak peek sound bite of what you’re about to read: If Dr. Copper was a surgeon; you wouldn’t want him to operate on you.
Dr. Copper Theory Explained
Copper is used in most economic sectors: Construction, power generation, power transmission, electronic products, industrial machinery, cars, etc.
The average car contains almost 1 mile or 75 pounds of copper. Additionally, copper is an excellent alloy and has become invaluable when combined with zinc to form brass and with tin to form bronze or nickel.
Copper is everywhere, that’s why demand for copper is often considered a leading economic indicator. The rationale makes sense, but is it true?
Copper – From Dr. to Quack
We will let the facts determine how reliable an indicator copper really is.
The charts below plot copper prices against the S&P 500 over the long-term and short-term.
The first chart goes back as far as 1959 and shows copper and the S&P 500 on a log scale. The dotted red lines mark copper highs, the dotted green lines copper lows. Shaded green bars highlight correct signals where falling copper prices predicted trouble for stocks.
It is somewhat difficult to correctly portray 54 years of stock market history on a few square inches, but it’s safe to say that copper, as an indicator, missed the mark more often than a Ph.D. should.
The second chart shows the correlation between copper and the S&P 500 from 2007 until now. The July 2008 copper high came too late to warn of the immediate post-2007 deterioration, but it was just in time to ring the alarm bells before the autumn 2008 meltdown.
The December 2008 copper low was a bit too early for the March 2009 stock market low, but correctly suggested higher prices until February 2011. Copper kept up a decent correlation until early 2012, but has been leading investors in the wrong direction ever since.
Copper’s Silver Lining
Remember that copper’s alleged predictive abilities can be seen as twofold:
1) As precursor for the stock market.
2) As precursor for the global economy.
By en large copper has failed as a leading stock market indicator (especially since 2012), but one can argue that the global economy has been deteriorating just as copper’s post 2011 decline suggested.
If it wasn’t for central banks’ coordinated inflation efforts, copper may have been right on both accounts.
Perhaps copper should be compared to ‘peers’ with an actual Ph.D. in economics – economists. Economists are generally bullish around major highs and bearish around major lows. Based on this benchmark, copper may well deserve its Ph.D.
What’s Next for Copper?
Right now copper is sandwiched between strong support around 3 and resistance at 3.2 – 3.3. Marginally higher prices seem likely. If resistance can be overcome copper may rally further. However, a drop below 3 should unleash much more selling pressure.
Copper ETFs
There are three copper exchange traded products (ETPs):
iPath DJ-UBS Copper ETN (NYSEArca: JJC)
United States Copper Index Fund (NYSEArca: CPER)
iPath Pure Beta Copper ETN (NYSEArca: CUPM)
All three copper ETPs are thinly traded, but JJC has thus far gained the most traction.


Weekly ETF SPY: Dow Jones Transportation Average & Dow Theory

Dow Theory has been around for many decades and just triggered a confirmed buy signal. However, Dow Theory has had its struggle in the Fed manipulated market and the buy signal may not be as strong as it appears.

On Thursday the Dow Jones Industrial Average (DJI) and the Dow Jones Transportation Average (DJT) reached an all-time high. According to Dow Theory, that’s a bullish confirmation.

Dow Theory has been around so long that it’s considered antiquated and outdated by many. Its roots go back as far as 1889 and start with a man named Charles Dow.

Dow started his career as an investigative reporter focused on business and finance. In 1885 Dow became a member of the New York Stock Exchange. In 1889 Dow began publishing a newspaper called the Wall Street Journal.

From 1899 to 1902 Dow published a series of editorials in his Wall Street Journal. Many asked him to compose a book made up of his editorials, but he didn’t. It was left up to others to continue Dow’s Theory and legacy.

Dow Theory students such as William Hamilton, Robert Rhea, George Schaefer, and Richard Russell kept the Dow Theory alive after Dow’s death. They were able to call the Great Depression market bottom in 1932, the turn to the downside in 1937, the 1949 market bottom and the 1966 top.

There are six basic tenets to the Dow Theory. One of which is that the averages must confirm each other. A bull market in the Dow Jones Industrial Average (NYSEArca: DIA) for example, could not occur unless the Dow Jones Transportation Average (NYSEArca: IYT) rallies as well.

Why? Only produced goods that are shipped to and paid for by the consumer confirm a strong economy (production without delivery would only inflate inventory).

Dow Theory was born in a free market and proved its worth many times in decades past. However, the Dow Theory track record in a Fed manipulated market is less than stellar.

For most of 2012 the Dow Jones was ‘doomed’ by a bearish non-confirmation as the Transports failed to confirm the Dow’s new high (dashed red box).

It wasn’t until March 2013 when both averages (industrials and transport) rallied to all-time highs, confirming the rally.

There have been some ups and downs since March, but the DJI and DJT both recorded all-time highs yesterday (July 18, 2013). This means that goods are manufactured and shipped.

Well, that’s what it used to mean anyway. Today it merely means that there’s enough liquidity to buoy different industry sectors.

This is a bullish development, although I’m not buying into the rationale that the stock market is up because the economy is healthy and that the economy is healthy because the transportation sector is confirming the industrial sector.

As the chart above shows, both averages are currently above their respective longer-term parallel channel. A move below the channel wouldn’t suffocate the bullish undertones, but as long as prices remain above, both indexes are ‘safe.’

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What’s Next? Bull or Bear Market? Try Gorilla Market

Right or wrong? The QE bull market will last as long as the Federal Reserve keeps QE going. A majority of investors say ‘Yes,’ but a curiously sophisticated experiment and powerful data suggest a surprise outcome.

In 2004 Daniel Simons of the University of Illinois and Christopher Chabris of Harvard University conducted a fascinating experiment.

If you want to be part of the experience take a minute (it literally only takes a minute) and watch this video before you continue reading.

To get the full effect, watch the video first and don’t read ahead.

If you don’t want to watch the video, here’s a quick summary:

Truth in Simplicity

The experiment is quite simple. There are two groups of three people each. One group is wearing black shirts, the other group white shirts.

The three people wearing black shirts are passing one ball to fellow black shirts; the ones wearing white shirts are doing the same. So there are six people, passing two balls.

The assignment is to watch how many times the players wearing white, pass the basketball.

It’s a simple assignment that requires some concentration and a clear mind.

The answer: The white shirts pass the ball 15 times.

But wait, there’s more. Many viewers get the number of passes right, but completely overlook a woman dressed in a gorilla suit. The gorilla walks slowly across the scene, stops to face the camera, and thumps her chest.

Half of the people watching the video did not see the gorilla. After watching the video for a second time, some of them refused to accept that they were looking at the same tape and thought it was a different version of the video.

“That’s nice, but what’s your point Simon?” Good question.

The Invisible 800-Pound Gorilla

The experiment was supposed to illustrate the phenomenon of unintentional blindness, also known as perceptual blindness. This condition prevents people from perceiving things that are in plain sight (such as the bear markets of 2000 and 2008).

Much of the media has zeroed in on one singular cause for higher or lower prices. Sample headlines below:

Reuters: Wall Street climbs as GDP data eases fear of Fed pullback
Reuters: Brightening jobs picture may draw Fed closer to tapering
Reuters: Wall Street slips amid Fed caution

The media is busy ‘counting passes,’ or watching Bernanke’s every word and interpret even the slightest variation of terminology.

The Fed’s action is the only thing that matters, but amidst ‘counting passes,’ many overlook the gorilla.

Gorilla Sightings

It’s believed that a rising QE liquidity tide lifts all boats. This was impressively demonstrated in 2010 and 2011 when various asset classes and commodities reached all-time highs. It only conditionally applies to 2012 and 2013 though.

In 2011 gold and silver rallied to nominal all-time highs. Why?

  1. The Fed pumped money into the system (aka banks) and all that excess liquidity had to be invested somewhere, anywhere, including precious metals.
  2. Fear of inflation. Gold is known is the only real currency and inflation hedge. Silver rode gold’s coattail and became known as the poor-man’s gold. From 2008 – 2011 gold prices nearly tripled and silver went from $8.50 to $50/ounce.

Since its 2011 high, the SPDR Gold Shares ETF (NYSEArca: GLD) has fallen as much as 38.29% and the iShares Silver Trust (NYSEArca: SLV) was down as much as 63.41%.

This doesn’t make (conventional) sense or does it. QE or the fear of inflation didn’t stop in 2011. In fact, QE (and the associated risk of inflation) is stronger than ever. Based on the above rationale, the gold and silvers meltdown is inconceivable and unexplainable.

The QE ‘Crown Jewel’

Initially QE was limited to government bonds or Treasury bonds. In other words, the Federal Reserve would buy Treasuries of various durations from banks and primary dealers with freshly printed money.

The effect was intentionally twofold:

  1. The Fed would pay top dollars to keep Treasury prices artificially inflated and interest rates low.
  2. The banks would have extra money to ‘play’ with and drive up asset prices, a process Mr. Bernanke dubbed the ‘wealth effect.’

With that thought in mind, take a look at the iShares 20+ year Treasury ETF (NYSEArca: TLT) chart above.

From the May peak to June trough TLT tumbled 14.56%, more than twice as much as the S&P 500 (7.52%).


The lessons are simple:

  1. QE doesn’t always work and can misfire badly.
  2. We don’t see every gorilla (or looming bear).

All this doesn’t mean that the market will crash tomorrow. In fact, the stock market doesn’t exhibit the tell tale signs of a major top right now and higher highs seem likely.

Unintentional blindness is real and often magnified by the herding effect. The investing crowd (or herd) is convinced that stocks will go up as long as the Fed feeds Wall Street.

The above charts suggests that we shouldn’t follow this assumption blindly.

Banks – Record High Excess Deposits May Fuel Stock Bubble

JPMorgan just recorded the largest amount of excess deposits in the history of banking. This sounds good at first glance, but it reflects a trend that exposes the entire banking sector to way above average ‘human error.’

In the aftermath of the financial crisis, the Fed kept encouraging banks to lend more.

Money makes the world go round and if banks don’t lend the economy doesn’t hum.

As of June 30, total loans by JPMorgan hit the lowest amount ($726 billion) since September 2012. Yeah, that’s not great, but not terrible either, it’s only a 9-month low.

At the same time deposits hit an all-time high of $1.203 trillion. That doesn’t sound bad; it just shows that JPM is well capitalized.

But behind the façade of engineered figures lurk some troubling questions:

  1. Banks are supposed to lend the money entrusted to them via customer deposits. The interest margin is where banks make their money. Apparently though, the margin business is no longer as attractive as it once was.

    Investing customer funds is obviously more profitable than lending. What happens if banks have no incentive to lend?

  2. JPMorgan’s excess deposits are at an all-time high of $477 billion ($1.203 trillion – $726 billion). Where does the excess money go?

The ‘London Whale’ trading disaster, which cost JPM some $3.4 billion (as far as we know), was funded by excess deposits.

With 61%, JPMorgan has the lowest loan-to deposit ratio and leads a trend. The average loan-to-deposit ratio for the top eight commercial banks has dropped nearly 10% in recent quarters.

We don’t know exactly where banks put their money, but we know Wall Street is just plain greedy. Like a horse, big banks will gorge themselves on juicy returns regardless of the consequences.

Right now it’s easier to make money with stocks, junk bonds, and other sophisticated leveraged instruments than lending. No doubt that’s where money is going and $477 billion (that’s just from one US bank) can buy a lot of stuff.

Based on past experience, big banks don’t know when enough is enough. Rather than stopping while they’re ahead, they’ll continue to play until someone gets stuck with a hot potato.

As per last week’s ETF SPY analysis, the Financial Select Sector SPDR (XLF) does not appear to have reached the end of the rope yet.

Higher prices are still likely, but technicals as well as big banks propensity for short-sighted decisions, caution that this time may only have been delayed, not different.