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mutual fund flows




As an addendum to yesterday's weekly sentiment overview, here is a bit more detail from Lipper FMI regarding US fund flows. There are only several sources for fund flow information and they each report slightly different statistics based on their methodology and thoroughness. But they all are estimates and with a few stragglers remaining yet to report, this is a preliminary report for the third quarter of 2010.

As we've already detailed numerous times, the same thesis remained in effect these past three months. US investors have left equity mutual funds in droves for the past few years for the perceived safety of bonds. That trend continued in the third quarter with taxable bond funds receiving inflows of $57.3 billion and municipal bond funds an inflow of $11.3 billion. Meanwhile there were outflows of $22.9 billion from Lipper's US diversified equity category. US mutual fund investors have been ambivalent about global equities adding just $300 million in the three months from July-September 2010.

Q3 fund flows Lipper Oct 2010

But if we include ETF fund flow data, the picture is slightly less gloomy. According to Lipper FMI, US investors added $4.2 billion to US domestic equity ETFs and a whopping $11.3 billion to global equity ETFs. The fixed income thesis remains intact with an additional $7.4 billion being directed to the sector via ETFs.

Focusing in on the equity flows, US large caps were the least favored hemorrhaging $15.1 billion. In contrast, emerging markets received $6.6 billion providing some fodder for Grantham's (and other's) concerns about a potential bubble developing in emerging markets such as Brazil, India, China, etc. But it just may be that investors are going where the returns are. Case in point, commodity oriented funds had inflows of $1.3 billion. And interestingly enough there is enough pessimism (or portfolio hedding) for $700 million being directed to dedicated short mutual funds.
Continue reading 'Third Quarter (2010) Fund Flow Report'

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Sentiment Surveys
Retail investors responded to the strength of the stock market this week by increasing their bullishness. The AAII retail investor survey showed 49% of respondents being optimistic about future gains and only 23.2% bracing for lower prices. This results in a bull ratio of 64% and is the third week out of the past four weeks that the bull ratio has been 64% or higher:
aaii bull ratio Oct 2010

Normally a slightly higher bullish sentiment (68%) corresponds to market tops but such a persistent condition of bullishness should be troubling.

Investors Intelligence
Stock newsletter editors also continued to increase their bullishness according to ChartCraft's weekly survey of sentiment. This week the Investors Intelligence survey had the highest level of bulls (45.6%) since mid-May 2010 (47.2%). The bears increased slightly to 28.3% resulting in a bull ratio of 62%. This is elevated but significantly below the levels we saw in May 2010 (75%) when there were 56% bulls and just 18.7% bears.

NAAIM Survey of Sentiment
Active money managers surveyed by the NAAIM weekly poll show a similar increase in optimism. This week is the third consecutive increase in bullishness. This week's mean NAAIM sentiment is 76.42% and the median 77.5%. Such an increase in long exposure isn't that surprising when it is put in the context of a generally rising stock market. Managers rarely fight the trend but what we are interested in is extremes of sentiment and so far we aren't seeing that. Below is a chart of the median NAAIM sentiment:
Continue reading 'Sentiment Overview: Week Of October 8th, 2010'

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Here is this week's sentiment overview:

Sentiment Surveys
The weekly AAII sentiment, measuring US retail investors shows a slight amelioration in their optimism. After reaching a critical level two weeks ago, the bull ratio has fallen from 68% to 57% with 42.5% responding as bullish and 31.6% as bearish:

aaii bull ratio Sep 2010 end

Since the S&P 500 index has trended sideways for the past week, it is promising that optimism is actually waning. Had we seen an increase in bullishness or even a holding pattern at the extreme level of two weeks ago, the market would be in a perilous state.

Investors Intelligence
For the second week in a row, in contrast to the retail investors, stock market newsletter (measured by ChartCraft's Investors Intelligence) survey are showing an increasing appetite for risk. This week, according to Investors Intelligence there were 43.3% bulls and 27.8% bears. This pushes the bull ratio to 60% - the highest since the end of May 2010. For a chart, please see last week's sentiment overview.

Hulbert Newsletter Sentiment
This isn't the first time that one measure of newsletter editors' sentiment has clashed with another one. The Hulbert Stock Newsletter Sentiment index (HSNSI) stands at 22.10%, meaning that of the newsletters that attempt to time the market, the average recommended market exposure is 22.10% long the equity market. To put that in perspective, this is rather low. In early August, the HSNSI was 35% even as the S&P 500 was at 1125. And the last time the Dow Jones stood at this level was in early May (before the 'Flash Crash') when the HSNSI was 51.80%. So it would seem that there are very few believers in the stock market's recent bullish behavior.
Continue reading 'Sentiment Overview: Week Of October 1st, 2010'

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Let's get on with this week's summary of sentiment data because we have a lot to cover:

Sentiment Surveys
This week's retail investor survey from the AAII shows an abrupt reversal. It was just four weeks ago in late August that the AAII's bull ratio (the percentage of bulls divided by the percentage of bulls and bear) fell below 30%. That threshold is the limit I was watching as a sign of too much pessimism.

And now, we are seeing the exact opposite with 51% bulls and only 24% bears, giving up a bull ratio of 68% - the highest for the whole year and the level at which we've seen the equity market react several times previously. As you can see from the chart, in recent years, we've seen this level reached only a handful of times: December 2009, May 2008, and October 2007. A quick glance at the chart of the S&P 500 will tell you that all of those instances were much better selling opportunities than buying ones:

aaii bull ratio chart Sep 2010

Having said that, looking at the long-term chart of the AAII data, it is clear that the bull ratio can reach much higher than the current 68%. In fact, as early as 5 years ago, the bull ratio went above 80%. And the highest point for the dataset was during the summer of 2003, at 89%. During bull markets, sentiment reacts differently and it takes quite a bit of optimism to reach an 'extreme' point.

Investors Intelligence
In contrast to the AAII, stock newsletter editors, as measured by ChartCraft's Investors Intelligence survey, were little changed from last week with 36.7% bulls and 31.1% bears. This is the second week the bulls have recovered from a yearly low but since reaching a top in January and April, optimism has been waning pretty consistently in this survey:

investors intelligence bull ratio Sep 2010

Daily Sentiment Index
This week the DSI for the S&P 500 index reached 83%. This is an elevated level but shy of an extremely optimistic level. In mid-April, the DSI reached 92% as the equity market reached an important top. For a chart with comparison to the S&P 500 index, see the previous Sentiment Overview (Week of April 16th 2010).

Bloomberg Professional Confidence Index
I was looking forward to this month's results from the Bloomberg Professional Confidence survey but sadly, it seems that it is being discontinued. This survey was conducted through the Bloomberg terminal and reached mostly an institutional audience for their take on various financial and economic questions. The survey included geographic breakdowns as well as asset allocation questions. The chart below shows the historical results for the global economic sentiment.
Continue reading 'Sentiment Overview: Week Of September 17th, 2010'

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Here is the sentiment summary for this shortened trading week:

Sentiment Surveys
Hard to believe it was just three weeks ago that retail investors showed some meaningful amount of concern. As you may recall, in late August the AAII bull ratio fell below 30%. This is an arbitrary "line in the sand" that I watch as a signal that we've arrived at an extreme.

The S&P 500 had fallen towards the lower end of its summer trading range and it quickly rebounded. Now, it is close to the top of the summer trading range. And now, suddenly retail investors are feeling just fine (again). The bull ratio this week is slightly above 58% with 44% forecasting the market to rise and 32% believing it will fall:

aaii bull ratio Sep 2010 update

This level of overall bullishness is the highest since late April 2010 and the highest percentage of bulls since mid April, just as the market made an important top. The nominal level of bullishness isn't the only thing that concerns me. It is also the fact that retail investors have a very short attention span and are willing to forgive and forget at the drop of a hat. Until we see true capitulation (with continuing reluctance to jump aboard an ensuing rally) it is difficult to see a way out of this choppy malaise.

Investors Intelligence
Newsletter editors rekindled their optimism this week with 33.3% registering as bullish in the weekly Investors Intelligence survey. The bears fell from last week to bring in an almost equal opposition at 32.2%. This brings about a recovery from last week's extreme but keep in mind that the bull ratio Investors Intelligence survey has been declining since hitting a high in late April 2010.

Daily Sentiment Index
The DSI for the S&P 500 index is at 71%. This is an elevated level of bullishness but not an extreme that provides us with a definitive edge. Much like many of the of the other sentiment indicators, the DSI is signaling an above average sense of optimism within retail market participants. But it is still far from a giddy sense of entitlement to higher stock prices.

NAAIM Survey of Active Managers
Active money managers, as measured by the weekly NAAIM survey continue to be ambivalent about the market. The average exposure shrunk this week slightly to 48% long the market from 53% last week. The median exposure was 50% long for the fourth consecutive week. According to the numbers, active managers can't make up their minds one way or the other like most other participants in the market and are waiting for a resolution of this sideways trading.

Here is the chart comparing the median NAAIM survey results with the S&P 500 index for the past four years:
Continue reading 'Sentiment Overview: Week Of September 10th, 2010'

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