Stansberry Research

What Hurts the Most

C. Scott GarlissStansberry Digest

Main Street and Wall Street are on the same page... What hurts the most... An important test for the S&P 500... Money managers' cash levels are near record highs... What that might mean for stocks... Steve Sjuggerud is back...


It's not just 'mom and pop' that are down on stocks...

Wall Street is, too...

Yesterday, we highlighted recent work from our colleague Brett Eversole which showed that a good portion of everyday mom-and-pop investors have rarely been as sour on U.S. stocks as they are now...

Today, I (Corey McLaughlin) want to share a similar story about a different group – Wall Street money managers and traders. They, too, are pessimistic about stocks. And as we said yesterday, thinking longer term, that might be a signal that now is a great time to buy...

Our Stansberry NewsWire editor C. Scott Garliss, who spent 20 years working on Wall Street before joining Stansberry Research, wrote about this today in his daily morning commentary...

We can't describe this story any better than Scott did, so what follows is what he wrote today. To get more of his work and everything from our free NewsWire service, be sure to sign up for updates here. Now, here's Scott...

Institutional investors are poorly positioned for a stock market rally...

There's an old saying on Wall Street... The stock market tends to do what hurts the most people the most. What it means is when the majority of investors are positioned the same way, the stock market tends to have the opposite reaction.

It's similar to the "Greater Fool Theory." The idea is that when everyone has bought into the same asset, there's no one else left to buy. In other words, there's nothing but downside. That's common during market peaks.

The S&P 500 is facing another important test over the next few weeks...

We're getting into the thick of fourth-quarter earnings. The process got underway with JPMorgan Chase's (JPM) results on January 13 and essentially wraps up when Disney (DIS) details its latest numbers on February 8.

So, we want to look at positioning to see what institutional investors are anticipating ahead of the results. By observing those metrics, it gives us a better idea of the setup. And when we understand the data, we get a better sense of what the stock market outcome may be if the results don't fare as well or as poorly as most investors are anticipating.

Based on current positioning, sentiment is low and money managers are cautious. That means they're anticipating disappointing results. So, the worst possible outcome is numbers that are in line or better than expectations.

That tells me the setup going into numbers is for a continued rally in the S&P 500 Index.

But don't take my word for it, let's look at the data...

Every Friday at 3:30 p.m. Eastern time, the Commodity Futures Trading Commission ("CFTC") releases its Commitment of Traders ("COT") report. It's based on the open interest of all options and/or futures contracts through the Tuesday prior. It also includes markets if 20 or more traders hold a position equal to or greater than reporting levels established by the CFTC and the respective exchanges.

We want to follow the noncommercial positioning in particular. A commercial trader uses futures-contract positioning to offset a specific commodity or hedge. But noncommercial traders are speculators who make a one-sided bet without an offsetting position. Typically, these are hedge-fund managers.

The best way to get an idea of current sentiment regarding the stock market is to study the open interest on the S&P 500. Based on the most recent report, fund managers are almost as short stocks as they were at the COVID-19 pandemic lows. In fact, those short bets have increased since the start of this year...

The current positioning is short more than 226,800 contracts. That tells me those money managers are anticipating the S&P 500 is headed lower because they expect earnings results to disappoint. But, as we can see, the last two times they were more pessimistic was just after the stock market bottomed out in April 2020 and the recent trough in October of last year.

The five-year average is long right around 16,500 contracts. So, if those bets against the S&P 500 are wrong, there's a lot of room for the market to move higher because of the consequent short covering that could take place.

Next, let's look at the amount of investor assets sitting in cash. We can observe this by looking at the Investment Company Institute's ("ICI") money-market assets. As we can see, the number hasn't been this high since May 2020...

Currently, the total amount of funds invested in the cash-like safety of money-market assets is $4.8 trillion. That's right in line with the $4.8 trillion total during the height of the COVID-19 pandemic. It's also well above the five-year average of $3.9 trillion and the one-year number of $4.6 trillion.

More importantly, it signals that there's a lot of excess capital waiting to be put back to work. By sitting in money-market assets, those funds are making little to no return. If the stock market keeps rallying, those investors are missing out on gains. Eventually, they'll be forced to chase.

Lastly, let's look at investor positioning in U.S. equities from the Bank of America Global Fund Manager Survey for January. As we can see, it has only been this cautious five other times in the past 25 years...

And when that has been the case, the returns on the S&P 500 have exceeded the lifetime average of around 9.1%...

We must remember that the stock market is the ultimate barometer of performance versus expectations. When expectations are high, they're hard to beat. And likewise, when they're low, it's difficult to underperform. And based on what we're looking at, numbers had better be awful.

Otherwise, all of those assets sitting in cash will be missing out on returns. And when that happens, it will slowly but surely start trickling back into stocks. And before we know it, that steady stream will turn into a flood, fueling a rally in the S&P 500.

The takeaway...

Corey again here to close things out...

As Scott described, looking at sentiment and what it can mean for short-term market moves is one of those counterintuitive ideas to most casual or new investors. It's something that goes against everything your mind or body might be telling you...

Listen, inflation stinks. And corporate earnings might get significantly dinged in the future... like we saw with Microsoft's (MSFT) earnings report yesterday. But if this is what a lot of people already largely expect and things aren't as bad as folks envisioned, Scott believes stock prices could rise...

Remember what he said at the start... the stock market tends to do what hurts the most people the most... This idea is already familiar to longtime readers, but it's worth a reminder.

Today, Main Street and Wall Street are expecting continued pain ahead for stocks... which could portend the opposite. We can't say for sure that it will, but at the very least, sentiment extremes – like Wall Street money managers sitting on high cash levels rarely seen in the past 25 years – are worth noting.

If you're looking for some more guidance...

These are two of the best things you can do...

  1. Stew on what we've been talking about this week and this year so far. Really think about this being a market with potential downside ahead in general. But there could also be upside right now in the right stocks. And...
  1. Tune in to what one of our longest-tenured editors has to say about the markets when he goes live with a brand-new video presentation next week. Our Dr. Steve Sjuggerud, editor of True Wealth, is breaking his nearly two-year silence to deliver his latest outlook...

You won't want to miss it. You might know Steve from popularizing the "Melt Up" concept. Without giving too much away, I can tell you that he's striking a different tone now...

He's warning that a massive reset is about to hit Wall Street that could make or break millions of Americans' wealth for decades to come. He also notes, as we have over the past two days, that sentiment is pretty negative about stocks today...

He believes the worst of the yearlong sell-off in stocks might be behind us, but he says you still need to prepare differently than you might have in the recent past if you want to substantially grow your portfolio in the years ahead...

He'll explain all the details in his new event, which goes live at 8 p.m. Eastern time on Tuesday, January 31. It's totally free. And just for tuning in, Steve will share two free stock recommendations... one name to buy and one to avoid completely.

Steve will also be joined by a "mystery" guest whom he calls one of the most "brilliant" he has ever worked with. It should be a great night. We just ask that you sign up in advance so you don't miss a minute. You can register right here.

Why Central Banks Want Gold

Fan favorite E.B. Tucker is back. He joins our editor-at-large Daniela Cambone for another wide-ranging interview on the state of the economy, currency moves, and why central banks are desperate to hoard gold...

Click here to watch this episode of The Daniela Cambone Show right now. And to catch all of the podcasts and videos from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 1/24/23): Alamos Gold (AGI), Arafura Rare Earths (ARAFF), iShares MSCI Mexico Fund (EWW), Flutter Entertainment (PDYPY), iShares 0-3 Month Treasury Bond Fund (SGOV), and Torex Gold Resources (TORXF).

In today's mailbag, more thoughts on U.S. government debt, including an upbeat response to a note in yesterday's mail... What do you think? Do you have a comment or question? As always, e-mail us at [email protected].

"Well said re our useless govt. in DC. Anyone with knowledge of history knows the result will ultimately be revolution, or civil commotion at best, with severe political/social consequences, and war.

"Why anyone prattles about our children and grandchildren will be saddled with this debt and 'have to pay it off' is beyond me. It will never be paid off; rather widespread poverty will occur in this country following an effective default on that debt by making the dollar worth a fraction of its now already significantly diminished value." – Paid-up subscriber Robert B.

"I think Luis A. has underestimated America. While true the U.S. will scratch and claw to keep the dollar as the reserve currency of the world, he has a very short sighted view of world finance. The U.S. has and always [will] be the leader in innovation while the rest of the world always plays catch up. There will never be a shortage of ideas to fix whatever crisis comes at America, and the world looks to us for the answers.

"Once this Marxist political agenda gets straightened out and finally debunked and found out the country will again come together and tackle the major issue of debt that is coming faster than anyone cares to admit right now. People are beginning to see how we've been lied to by the climate alarmists and censored by the government and who is to blame for doing it.

"I'm not saying one party is to blame for all of it. I believe it's all coming to a head as more and more lies are being found out. The oceans aren't boiling and Florida is still not under water. It's been predicted for the last 40 years.

"While I still don't know how common sense seems to dissipate once a person gets elected to office I believe enough ideas will come in the future to keep America ahead of the rest of the world and keeping us the country the world looks to save them all. Luis needs to keep the faith as America has and will always come out on top." – Paid-up subscriber James S.

All the best,

C. Scott Garliss with Corey McLaughlin
Baltimore, Maryland
January 25, 2023