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Sentiment Overview: Week Of April 2nd, 2010 at Trader’s Narrative

Here is the sentiment overview for this shortened trading week (Easter greetings!):

Sentiment Surveys
According to the AAII weekly sentiment survey of retail US investors, 41.3% of respondents are bullish this week, that is a change of +8.9% from last week. And there are 31.2% bears, which is a slight decrease (-3.5%) from last week. Stepping back to gain a long term perspective, we find his survey to be in line with its long term average ratio of bull/bear. So it is not flagging an inordinate amount of optimism right now.

The Invesors Intelligence survey of newsletter editors is slightly more lopsided with 48.3% bullish and 19.1% bearish. The II bull/bear ratio this week is 2.5 which is rather high but still not at the extreme of 3 which we watch for.

NAAIM Sentiment
Institutional money managers, as measured by the NAAIM Sentiment survey is once again getting extremely optimistic.

Most money managers are almost completely invested long the market. The average NAAIM weekly survey was 83.26% which is the highest level of bullishness since the end of September 2009 (at 86%). And the median measure once again bumped up to 95%. There was also very low variation in the answers, implying that the respondents are feeling confident about their long positions.

NAAIM survey of manager sentiment Apr 2010

The above is a chart of the average NAAIM survey data, if you want to see a chart of the median, check out last week’s sentiment overview.

ISI Institutional Equity Manager Sentiment
This is a new sentiment survey, at least to me. It is from ISI which is made up of a broker-dealer and an investment management firm. They have several sentiment surveys: Equity, Bond, Hedge Fund (Equities), Equity Sector Allocation, and Hedge Fund Sector Allocation.

Today we’re looking at the Institutional Equity Survey. To calculate it, each week 42 institutional equity managers representing about $500 billion are asked about their bullish or bearish stance on equities for the following 6 months. They are also surveyed on their current position, relative to their benchmark.

The current 4-week smoothing of the results shows a very optimistic outlook for the stock market. To find a more bullish ISI Equity Manager Sentiment we have to look back to May 2008 as the S&P 500 index reclaimed the 1400 level.

ISI equity manager sentiment survey Mar 2010
Source: Is There Excess Bullishness or Malaise (or both)?

I’m surprised to see that October 2007 doesn’t correspond to the highest bullish sentiment level in the past few years. Perhaps it speaks of the way that the stock market fooled even institutional managers to believe in the up trend. When it recovered from the first drubbing it got in late 2007, they were more than happy to believe again and go all in.

Also, I’d prefer a larger sample size than 42 but then again, there are several times back in the early days of the AAII survey when the response rate was not much higher. For example, in July 1991 only 36 members filled out the weekly AAII survey but that data point is used widely. But for the most part we have a more than a hundred respondents. For some reason, the AAII stopped reporting the response rate in 2000 so we have no idea how robust the data is.

Conference Board Consumer Sentiment
The data from the Conference Board’s Consumer Sentiment survey shows that while things have improved, we are still very far from the average and even farther from positive economic periods:

conference board consumer confidence Mar 2010

Short Interest Ratio & Fund Flows
Charles Biderman was on CNBC this week and talked the fund flows into bonds as opposed to equities which he interprets as bullish. He also mentioned the pickup in the short interest ratio which is the highest since July 2009. I’m a bit skeptical about using short interest since I’ve been wrong before.

We also looked at fund flows which showed the retail investors love affair with bonds. A few readers were interested to know how ETF fund flows are in comparison. Biderman goes on to mentioned the heavy buying of leveraged short ETFs and the heavy selling of leveraged long ETFs which he interprets as bullish from a contrarian basis. To play devil’s advocate, I would suggest that many institutions are using these leveraged ETFs in hedging strategies so the message may not so clear cut.

Would someone please go over and poke the VIX to see if it is still breathing? I know that low volatility is not necessarily a sign of a market top but also consider that contraction leads to expansion in the market. So don’t let this lethargic interlude lull you into apathy.

Option Sentiment
The CBOE put call ratio is little changed this week. While the 10 day average of the equity only ratio is slightly off its low from last month, we find option traders, by far, continuing to prefer calls to puts:

CBOE put call equity ratio 10 day average Apr 2010

The ISE Sentiment index which is a call to put ratio continues to show a similar level of optimism. Over the past 10 trading days, retail option traders have purchased slightly more than twice as many call options (to open a trade) as put options:

ISE sentiment 10 day moving average Apr 2010

The current 10 day average stands at 204.4 which is the highest since January 19th 2010 (when it was at 207.3) corresponding to the S&P 500 at 1150 - just before it corrected 8% into February 2010. And going back even further, to November 2007 just as the stock market crested.

Junk Bond Issuance
There is an almost insatiable appetite for junk bonds on Wall Street right now. Usually this is a sign of too much froth in the markets but even as the issuance of high yield bonds hits an all-time high, I can’t help but wonder if this is the return of risk in a big way or just desperate and yield hungry investors trying to eke out performance in a zero interest rate environment.

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2 Responses to “Sentiment Overview: Week Of April 2nd, 2010”  

  1. 1 DoctoRx

    Nicely done.

    A reasonable interp given weak current conditions (ECRI’s coincident indicators remain below those of 1 year ago) is that stock averages are at best ahead of themselves.

    My only quibble relates to the final comment. Why should it matter whether renewed interest in junk bonds relates to specific risk appetite or frustration w ZIRP? Either way, investors are taking on lots of credit AND interest rate risk.

  2. 2 Fibocycle

    Although the public seem to be creeping back into the market, I wonder if the large institutions that are taking advantage of the ‘Zero Carry’ realize that they are creating another bubble–one that will not only catch the public by surprise–but also catch the ‘usual suspects’ off guard as they wallow in their ill-gotten gains. If and when the neckline is broken on the 30 year treasury bonds (head and shoulders) it might act as an antecedent event that will rock other markets.

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