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Here’s this past week’s sentiment wrap-up:
ChartCraft’s famous sentiment indicator, measuring newsletter editor’s mood shows 31% optimistic and 38% pessimistic. So the slow, rebuilding of confidence continues with a gradual growth of the bullish camp. However, we did see, what has to be considered real bearishness. For example, consider that back during the end of the previous bear market (2002-2003) the II bullishness ranged from 40%-30%. And during this bear market we’ve see it in the 20’s for a few weeks. The question is, how comparable is this market to “normal” bear markets we’ve seen before?
This week’s survey of retail investors shows a slight reduction in bears to 37% and an almost proportionally equal increase in bulls to 43%. This is natural considering the market moves we’ve seen but we are now once again in “no man’s land”, having quickly resolved the extreme pessimistic sentiment reading in February 2009. Contrarians are interested in not only extremes of sentiment but also divergences and while we saw the first, the second is missing so far.
AAII Asset Allocation
Although not as famous as the weekly sentiment survey mentioned above, the AAII folks keep track of another sentiment metric: how their members allocate assets between cash, bonds and equity. As you can imagine, moments of extreme are contrarian signals. For example, in early 2000, AAII respondents had on average a paltry 12% allocated to cash with the bulk of their portfolio (77%) in equities. We know how that story ended.
The last time we went over this metric was in a mid-February sentiment overview when the AAII asset allocation had skewed heavily towards bonds, reaching a decade plus high. Since then bond allocation has been reduced from 24% to 14% (I guess they beat a quick retreat when the bond market didn’t cooperate).
But more interestingly, the cash allocation is now 45% - an all time high!
And equity allocation is down to only 41% - an all time low!
As if we needed any further confirmation that what we are living through these days is a market of epic proportions. But there it is. The AAII equity allocation is now lower than at any time since the data - going back to 1988 - started to be collected.
After reaching historic lows (again) in February, the Conference Board’s Consumer Confidence index inched higher in March (going from 25.3 to 26). For the most part you could argue that not much has changed from the perspective of US consumers. Most of the tiny uptick can be attributed to the Expectations index which measures consumer sentiment towards the future - it was up 1.6%:
We are still seeing generational lows in consumer confidence. This index was started in 1967 but the lowest handle it had ever had was 40 - until late last year when we made history (and continue to do so). The previous historic low was in 1974 during the dark days of that bear market and the next lowest was in early 1992. So it won’t surprise you that, within a long term view of the market, depressed consumer sentiment is one of many conditions necessary for a new bull market.
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