Here is a recap of this week’s sentiment data:
According to the AAII weekly sentiment survey the average US retail investor grew bolder: 48.5% expect higher stock prices and 30% expect lower prices. To put things into perspective, the bull ratio has climbed up to 62%. But it is still not at levels that have corresponded with market tops in the past few years. For a chart of the bull ratio, see last week’s sentiment overview. As well, keep in mind that this survey was conducted yesterday, before today’s tumble.
According to the Investors Intelligence sentiment survey, newsletter editors also became more bullish with 51.1% expecting higher prices and only 18.9% expecting lower prices. This has pushed the ratio to 2.70:1 - very close to the 3:1 and above ratio that I’ve been watching. Similar to the AAII survey, this survey was conducted before Friday’s drop (on Tuesday, April 13th 2010) so it doesn’t take into account how they may have changed their stance since.
Hulbert Stock Newsletter Sentiment Index
In contrast to the II survey, the HSNSI has actually fallen slightly. After reaching a recent peak in January at 65% the HSNSI fell to just 13% at the bottom of the February correction. In March it recovered to 63% and since has gone down ever so slowly.
So the average market timer tracked by the HSNSI is now recommending that their clients have only 50% of their portfolio long the market. This implies that while they are reluctantly participating in the rally they are still not convinced that the cost is clear for a full allocation.
Daily Sentiment Survey
The DSI has been creeping ever so slowly higher and has now reached 92% for the S&P 500 index. This chart, courtesy of Elliott Wave International, compares the S&P 500 index with the DSI indicator:
Source: Elliott Wave
Notice that an extremely high DSI reading is not an automatic contrarian sell. Last summer we had a persistently high bullish DSI while the stock market continued to churn higher. As Jake Bernstein, the creator of the Daily Sentiment Index, mentions repeatedly the DSI is just one part of the equation.
This week’s NAAIM survey shows that the average active money manager is slightly less bullish: down to 77% from the previous week’s 86%. But the median allocation is still very high at 90%. This is the third week in a row and four weeks within the past 5 weeks that the median allocation has been extremely bullish. Click to see a chart comparing the NAAIM with the S&P 500 index.
Merrill Lynch Survey of Fund Managers
The latest ML survey covers 197 fund managers overseeing $546 billion from April 1st to 8th 2010 and shows that on the whole, they are becoming more confident of a “perfect scenario” where the economy recovers, rates stay put, corporate profitability rises, and inflation is non-existent.
42% of fund managers surveyed expect the Fed to wait until next year to raise interest rates. 71% expect earnings to continue to increase by at least 10% and 52% are overweight equity allocation within their portfolios (especially cyclical stocks). This has caused cash to fall to just 3.5% (down another 0.3% points from March’s survey).
While they are slowly adding positions in the financial sector, it still remains one of their least favored sectors: in March net 24% were underweight banks, in April it is net 10% of respondents underweight banks. As managers have pulled money out of Greece and the Eurozone, they have re-allocated to other regions with Japan being a clear favorite. 18% are underweight Euro markets and 12% are overweight Japan.
Hedge Fund Flows
The most seductive thing in finance is performance. With hedge funds returning to positive returns, asset flows have quickly followed. According to TrimTabs and BarclayHedge, the average hedge fund returned 3.05% in March and 20% in 2009. According to Credit Suisse Tremont Index the average return in February was 0.68%.
The report from TrimTabs/BarclayHedge estimates inflows of $16.6 billion to hedge funds in February 2010. Within the wide range of hedge fund offerings, distressed securities funds received the most relative inflows in February (4.2% of assets). Aggregate assets now stand at a 16 month high of $1.5 trillion dollars with a growing number of funds domiciled outside of the US.
According to Vickers Weekly Insider Report, US corporate insiders are selling on average 4.96 times as many shares as they are buying. This is very close to the 5.15:1 ratio that we saw in early January, as the market reached a peak. And it is in direct contrast to how insiders behaved in response to the correction in February when they sold just 2:1. Even more ominously, an 8 week short term moving average which smoothes out the ratio is now at the highest it has been since July 2007 (with the exception of a brief blip higher in October 2009).
There is corroborating data from TrimTabs which shows that year to date, insiders have sold 6 times as many shares as they have bought. In March the ratio was even higher at 8:1 - since insiders are always selling more than they buy the key is to watch this ratio hit extremes like it is now.
I’ve yelled myself hoarse these past few weeks over the crazy things we’ve seen out of the options markets. So there is little to say above and beyond what we’ve already discussed. If you’ve missed the recent notes and charts, you can find them here:
- Today It’s The Retail Option Traders Turn To Go Crazy
- Option Traders’ Bullishness Off The Charts
- Option Traders Go On Call Buying Binge
- Option Traders Reach For Gains, Forget Risk Completely
The news of SEC action against Goldman Sachs today brought with it a rare down day. And with it, the option market’s enthusiasm seemed to calm down a little. The ISE sentiment dropped from an all time high to
very close to all time lows 233:
Again, this is unprecedented. It does imply that while retail option traders are willing to slam the pedal to the metal, they are also quick to jam on the brakes. Of course, one data point is not very convincing. The last time the ISE equity only call put ratio was lower was on June 18th 2009 when it was at 92. As you can see from the chart, retail option traders very rarely buy more puts than calls.
I’m indebted to several readers who wrote in the comments (and emailed me) to point out that I made a transposition error: the 107 call put ratio was for the total ISE sentiment ratio not for the equity only call put ratio which is 233. This is not very low as you can see in the corrected chart above. It is a large drop but it leaves us still very much in a bullish extreme setting with the 10 day equity only ISE sentiment average at 247, firmly higher than even the most giddy heights we saw in 2007.
If the market does correct here, even a small correction of say 5-10%, it would be instructive to see how the option market reacts to it. If they give up on their bullish convictions with the rapidity and intensity that we saw today, then the correction would probably be contained. But if they insist on “buying the dip” then from a contrarian point of view, things would need to go lower to wash out the weak hands.
The daily CBOE put call ratio (equity only) moved back up to 0.53 - but while that is a slight improvement from the recent extreme bullishness it is hardly demonstrative of the return of real fear. I was expecting a sharp spike up to 1.0 or higher just like the ISE sentiment. As a result the 10 day moving average remains at incredibly low levels. For a chart of what I mean, see last week’s sentiment overview.
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