If they truly knew what to expect they would have been heavily in stocks at market bottoms. They’d have been stocked up on defensive bonds near cyclical stock market peaks. They would have been running lean bond inventories when stocks were bargains.
Since 2008 at least, that has rarely been true.
The top chart shown below follows the trends in Primary Dealer Treasury holdings for the period Aug. 6, 2008 through Nov. 28, 2012. At the very start of that period the broad market was about to get pummeled by the Lehman bankruptcy melt-down.
At that very high-risk time primary dealers were extremely light in their holdings of Treasuries. When they should have been hunkering down, their T-bond inventories were at extremely low levels. Treasury portfolios that skimpy haven’t been seen again since.
As the S&P 500 moved to generational lows in early 2009... professional dealers were busy reducing their equity holdings and cranking up their fixed income portfolios.
I’ve noted (with red stars) four subsequent periods when these same ultra-sophisticated dealers went to overloaded T-bond positions. The lower chart of the SPY (S&P 500 ETF) highlights those same time periods with green stars. Please note that the scales of the charts do not match exactly. The stars denote the same moments in time.
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Each time primary dealers went whole hog into bonds the S&P 500 was at a relative low point. Stocks were cheap. The only recent occasion when the big dealers were really correct was when they reduced bond holdings in mid-summer of 2011. Even a broken clock is right twice every day.
That makes me think that primary dealers’ late November, all-time record, Treasury holdings might be signaling another great buying opportunity in stocks. The primary dealers were wrong at six of the previous seven key turning points.
Ignore the temporary fiscal-cliff panic selling. Buy quality stocks which are selling for good prices.
A better than 85% success rate (betting against them on this basis) is probably as a good as it gets in today’s world.
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