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What a week! Between the Fed's much awaited QE2, the mid-term elections, payroll data and the rocket ride higher, the sentiment cross-currents are getting difficult to read. Here's this weekly sentiment overview to (hopefully) provide some insight:
The AAII survey of retail investors showed that the extreme optimism we saw last week took a small step back. The bulls declined to 48.2% while the bears increased to 29.8%. This provided a bull ratio of 62%, down slightly from the previous week's 70%.
The interesting aspect of this development is that the survey was taken on Wednesday, one day before the big rally. At that point the S&P 500 index has managed to climb about 15 points and yet optimism ebbed slightly and bearishness rose. In a sense, this shows a morsel of reluctance on the part of the average US investor to jump in with wild abandon.
I look forward to next week's AAII sentiment survey results because if the market continues to rally or hold at this level and we see the retail investor sentiment continue to lag, then this provides a strong argument for further gains. But if we suddenly see the AAII bull ratio shoot higher (perhaps even above 70%) then the opposite argument can be made.
There was little change in this week's II survey: the bulls gained a sliver to 46.7% while the bears remained unchanged. The bull ratio was also little changed from last week. So we remain at approximately twice as many bulls as bears. Certainly an overall bullish picture but not at the excessive level (3:1) that usually corresponds to major or intermediate tops. For a chart of the Investors Intelligence bull ratio see last week's sentiment overview.
Hulbert Newsletter Sentiment
Another survey of newsletter editors is finding much less enthusiasm. According to Mark Hulbert, keeper of the Hulbert Stock Newsletter Sentiment index, while there was an expected jump in optimism after Thursday's rally, the HSNSI is still lower today than it was in either April or January 2010.
Continue reading 'Sentiment Overview: Week Of November 5th, 2010'
Elliott Wave International has provided a complimentary report titled, "The Next Major Disaster Developing for Bond Holders" which includes the latest commentary on fixed-income markets adapted from various Elliott Wave International's publications, including 2010 issues of Robert Prechter's monthly Elliott Wave Theorist and its sister publication, The Elliott Wave Financial Forecast.
To download this important Club EWI report free, click here.
Below is an excerpt from the October issue of The Elliott Wave Theorist by Robert Prechter:
...History shows that investors have been attracted like moths to a flame to four consecutive pyres: the NASDAQ in 2000, real estate in 2006, the blue chips in 2007 and commodities in 2008. Now they are flitting across the veranda to a mesmerizing blue flame: high yield bonds. Bonds pay high yields when the issuers are in deep trouble and cannot otherwise attract investment capital. The public is chasing a large return on capital without considering return of it...
The Elliott Wave Financial Forecast - October 2010 by Steve Hochberg and Pete Kendall
The rise in optimism since early 2009 has allowed corporations to issue the lowest grade debt at a record rate, even more than in the middle of the incredible expanding debt bubble of the mid-2000s. The annual total of $189.9 billion to date is a record, and the entire fourth quarter still lies ahead.
This is a stunning testimony to just how desperate investors are for the returns they grew so accustomed to during the old bull market. The Moody's BAA-to-Treasury spread (see chart in the free report) has been widening since [April] and has made a series of lower highs in August and again in September. This behavior reveals an emerging preference for perceived safer debt even as junk bond issuance races higher. It is a critical non-confirmation...
Click here to read the rest of this important report online now, free! The complimentary report includes:
- How Investors Are Looking Past Red Flags in Muni Market
- What You Should Know About Today's "High-Grade" Bonds
- The Answer To Bond Selection
This week the Investors Intelligence survey of newsletter editors is 46.7% bullish. That is the highest level of bullishness since May 2010. Another sentiment measure, much less known is the Rydex SGI Advisor Confidence Index (ACI).
This is a survey conducted monthly to gauge the sentiment among personal financial advisors and their outlook for the US economy as well as their stock market outlook. It is intended as the professional equivalent to the Conference Board Consumer Confidence Index which measures the average consumer's sentiment every month.
Here's a chart comparing the S&P 500 index with the ACI over the past few years:
The most current level of the Rydex SGI Advisor Confidence Index is 110.63 which is the highest level of confidence since July 2007 with a corresponding level on the S&P 500 index of 1455. Like other sentiment indexes, generally speaking, the ACI tracks the stock market and is a contrarian indicator.
In 2007 the ACI peaked on February 2007, well ahead of the October 2007 market top. And like many technical and sentiment indicators, it found a bottom in the dark days of October 2008 and by the spring of 2009 it was already climbing. Similar to other sentiment measures the current level doesn't provide enough reason to see excessive bullishness on the part of financial advisors but it is not far off either.
But that confidence may mask the reluctance of the average financial advisor from pushing their clients into stocks. According to a recent WSJ article, a recent survey of advisors by Charles Schwab found that 77% are planning on maintaining or increasing the fixed income exposure of the portfolios they manage. This of course, has been the tendency of retail investors as we've seen in the flow of mutual fund data month after month.
The most recent preliminary data for the month of October shows this trend continuing with $9 billion flowing out of domestic equity funds and $25 billion flowing into bond funds.
Institutional Asset Allocation
Pension funds which are at the other extreme of the investment spectrum manage huge portfolios. But surprisingly, they have been taking a page out of the playbook of the US retail investor. That is, they have been actually reducing their exposure to equities and increasing them significantly towards fixed income.
According to McKinsey, there is an estimated $1 trillion movement away from stocks as pension funds attempt to reduce the perceived risk of future market volatility on their portfolios. In the heyday of 2000, pension funds had almost 70% allocation to stocks but that has dwindled to 45% (July 2010). If the trend continues, pension fund equity exposure will be at levels last seen in early 1990's.
While this may seem contrarian at first, any bull should be concerned that such huge amounts of demand are being drained out of the financial markets. One of the reasons why we had such a strong bull market was the strong and persistent demand for stocks from both institutional sources like pension funds and retail investors through mutual funds.
Finally, I wanted to mention the opinion of two "greybeards" that I admire: James Stack of InvesTech and Steve Leuthold of Lethhold Weeden Capital. Both of them are bullish right now.
Stack wrote recently that the bull market has been "reconfirmed". He bases his outlook on the "wall of worry" that the bull market is climbing and on the technical aspect of the market. Specifically, he looks at the low number of stocks hitting 52-week lows, believing that this is one of the signs of a healthy bull market. As well, Stack considers the current market to be very broad based and therefore, a healthy bull market. When the market leadership narrows, there is cause for concern of course, as less and less individual stocks are called upon to carry indexes higher.
In a recent interview Leuthold mentioned that he has between 60-69% exposure to the stock market believing that, at least, for the remainder of the year, we are going to see higher prices. But he is not very confident when he looks beyond the horizon into 2011 and 2012. As well, about half of his exposure is to global markets with a strong emphasis on Asia.ACI, Advisor Confidence index, asset allocation, James Stack, pension funds, RYdex Advisor Confidence, sentiment, Steve Leuthold
The mid-term US elections are finally here. Most are expecting the Democrats to keep control of the Senate and to lose control of the House to Republicans. I was curious to know what the prediction markets for the mid-term election were saying so below are the relevant charts from the Iowa Electronic Markets and intrade. And then, perhaps most importantly, what the election results mean for the stock market.
Iowa Electronic Markets 2010 US Senate Control Market:
- NRS.gain10 (blue line) will provide a payout of $1 if the Democrats have more than 60 Senate seats ($0 otherwise)
- NRS.lose10 (red line) will provide a payout of $1 if the Democrats hold fewer than 50 Senate seats ($0 otherwise)
- NRS.hold10 (black line) will provide a payout of $1 if Democrats have at least 50 but not more than 60 seats ($0 otherwise)
Iowa Electronic Markets 2010 US House Control Market:
- NRH.hold10 (blue line) will provide a payout of $1 if Democrats and Independents have more than 217 but no more than 258 House seats ($0 otherwise)
- NRH.lose10 (red line) $1 if Democrats and Independents have 217 or fewer House seats ($0 otherwise)/li>
- NRH.gain10 (black line) will provide a payout of $1 if the Democrats and Independents have more than 258 House seats ($0 otherwise)
While the weekly sentiment overview on Friday covered a lot of ground, a few data points came up afterward that warrant mention before another weekly sentiment walkthrough.
First, a reader inquired about the sentiment landscape for gold right now. I wrote about gold about a week ago: Gold Reacts To Bullish Extreme Sentiment (Finally). At that time we looked at the gold DSI, the Rydex market timers views on gold and the premium/discount on a gold closed-end fund. I concluded:
Based on these various sentiment gauges it is possible that we have seen a major top for gold but that in response gold will not decline heavily.
So far, that has been the case. Gold has refused to fall below $1325 and seems to have put in a bounce. Total funds in the Rydex Precious Metals fund have also rebounded from their recent low of $243 million to $268 million (after a peak of $282 million in mid-October).
The weekly Bloomberg gold sentiment survey is a new indicator that we haven't discussed before. I've smoothed out the data with a 4 week moving average since it can be a bit jittery. As you would assume, it can provide an edge as a contrarian indicator. In the past, when the bull ratio of this survey has been low, gold has tended to find a bottom. And when the bull ratio is high, a top.
I was surprised to see that the short and shallow correction in gold was enough to provoke a 24.5% point drop in the bull ratio - it fell from its high of 82.5% in late September to just 58% last week. Even though the nominal level of the bull ratio is not as low as previous bottoms, the precipitous fall does suggest that a lot of bullish optimism has been swiftly wrung out of the gold market. And it also shows that investors are continuing to be skittish even in the presence of a secular bull market.
Barron's Big Money Poll
The semi-annual Big Money Poll from Barron's got the usual amount of attention this weekend. This isn't surprising when you consider that the participants are some of the brightest and most successful money managers in the US. But are we to perceive the sentiment data it provides directly or through a contrarian lens?
From the latest Barron's Big Money Poll, 4% are very bullish, 56% are bullish, 3% are very bearish and 12% are bearish (with the rest being neutral). This provides a bull ratio 80% (that is, taking the total bulls as relative to both bulls and bears). This is a slight increase from the last Big Money poll in April 2010 (75%).
Continue reading 'Sentiment Addendum: Gold, Big Money Poll & More'