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Yesterday I wondered, “Where is the fear?” I guess it depends where you look! In that analysis I was looking at the options data and the fund flows in the leverage ETFs.
Today we finally have some definitive signs that traders and investors are very concerned about further market declines. And it comes from sentiment surveys. From a contrarian point of view, this is a positive development because it increases the chances that the bull stampede that we saw yesterday was an inflection point.
The first empirical data point is from the weekly AAII survey which shows a collapse of optimism and a huge increase in pessimism taking the bulls down to 21% and the bears up to 57%. In today’s Morning Notes there was a chart of the spread (bulls minus bears). I prefer to look at it slightly differently by taking the data for the bulls and dividing by the total of the decideds (bulls and bears) to get a “bull ratio”:
The bull ratio fell to 27% which is the lowest since March 2009. In fact, to find a more pessimistic sentiment from the AAII we have to cast back to March 5th 2009 when the bulls numbered only 19% and the bears a whopping 70%.
It is also important to note that the survey was taken on Wednesday, when the respondents had presumably digested the 3% spike up in most major indexes. So people weren’t really swayed by Wednesday’s move or if they were, then pessimism would have come in much lower without that one strong positive day.
NAAIM Survey of Managers
Another survey released today is the NAAIM survey of manager sentiment which tracks the position of NAAIM members. This week’s data shows a mean overall equity exposure of just 13.47%, this is the lowest since March 18th 2009 when it was 9.97%:
As you can see in both charts above, there was an “Oops!” moment where for a few weeks both the retail and professional market timers thought that they had the all clear only to see the market go lower. The good news, from a contrarian perspective, is that once the market did break down, we saw a response of capitulation.
If instead we had seen people petulantly insist on their bullish posture, that would have provided a huge warning for the market - even a crash warning. But we are finally seeing real fear.
To complement the quantified sentiment data we have this anecdotal evidence from a reader:
As a 25 year Registered Representative with a large book retirees and soon to be retired the phone calls I’ve received over the last three weeks are worse than what I received during the Lehman fiasco. I don’t understand where pundits get the idea that investors are complacent. They evidently aren’t answering the phone with actual stressed clients on the line thinking “Oh no not again”. They are disgusted by the “Flash Crash” and program trading.
There you have it. More data and analysis tomorrow in the weekly sentiment overview!
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