Below is this past week’s summary of sentiment data:
According to the American Association of Individual Investors, the average retail investor in the US is down right giddy. This week the bears declined by 2% points to number just 33%. The bulls meanwhile managed to eke out a tiny 1% point increase from last week to reach 51%. Anytime we see the magical 50% mark in either camp, I take special notice.
To find a higher level of bullishness, we have to go back to May 2008. For the week of early May 2008, the AAII survey showed 53% bullishness. In that sentiment overview, I wrote:
There is no way we can discount or ignore this. Such a high level of bullishness is downright frightening - from a contrarian point of view.
When I wrote the above, the S&P 500 was trading around 1410. In a few weeks it had managed to peek over 1420. But that was it. If you were looking or a sign that the market rally had petered out, you would have a hard time finding a better one. By July 2008 it had fallen to 1200 and by November to 750. As well, this level of bullishness is extra noteworthy because it was at this level of optimism on October 2007 that the stock market topped and entered into its current bear market.
In the same way, I think today, if this single data point doesn’t make you run for the door, it should at least be making you eye the exits warily. While the retail investor has been building back their confidence throughout this rally, their increasing bullishness will inevitably reach a climax point. Here’s a chart showing the last 3 times that the AAII sentiment was so optimistically lopsided that at least 50% were bullish:
Turning to the survey which measures stock newsletter editors, ChartCraft’s II came in this week with 49.4% bulls (a 7.2% point increase from 2 weeks ago) and just 21.3% bears (almost 10% points decrease from last week). After a length of time where the II and AAII were not synchronized, they now are not only showing almost the same level of extreme bullishness, they have both insisted on becoming even more bullish this week.
Accordingly, we have twice as many bears as bulls now. The negative consequences of this much unreserved joy isn’t difficult to fathom. This week’s data is highest level of bulls since January 2008 and the lowest level of bears since October 2007. Obviously neither of those times an opportune moment for the longs.
According to the Conference Board, a survey of CEO’s in the US shows that 55% of them are now expecting an economic recovery in the next 6 months. That is a 38% point improvement from March 2009 - the second largest such increase in the 33 year history of this survey. The largest jump came as we left behind the recession of 2001.
The National Federation of Independent Business’ sentiment survey of small businesses does not show a concomitant increase in optimism. In fact, the NFIB’s small business sentiment index fell to 86.5 - the lowest level since March 2009, when the market made its lows. Not only that but the July result was among the 5 lowest readings in over 30 years of the survey’s history. So clearly, the US small business owner is still suffering tremendously.
This week the CBOE’s (equity only) put call ratio didn’t even rise above 0.65 and closed today at 0.52 - not far from its low of last week. Basically we see the same approximate ratio as the sentiment surveys suggests, 2:1 bulls to bears. To see the chart of the CBOE put call ratio, check out last week’s sentiment overview
The ISE sentiment index continues to forge its own bland path. The daily numbers reached a low of 146 and a high of 180 this week and the 10 day short term moving average is only at 168 - neither hot nor cold. I’m not sure why the ISE option traders are not showing the same level of bullishness. If you do, drop me a note in the comments below.
Traders in the CBOE’s volatility index (VIX) futures are betting that the index will rise by 13% in 5 weeks. That’s the biggest such spread since August 2008 - just before the waterfall decline. So it would seem that the smart money is willing to pay a premium for protection in case the stock market declines. I consider this a ’smart money’ indicator since the average retail trader or investor has either not heard of the VIX or has never traded a futures contract.
According to InsiderScore, corporate insiders have reduced their buying and increased their selling activities. This has caused the ratio to reach a multi-year low. Although this is another ’smart money’ indicator, it is one which usually precedes the market by a few months. For example, to find a lower ratio of buying to selling we’d have to go back to late 2006. But the market didn’t really top out until we were well into 2007. So if we were to go by this indicator exclusively (which we don’t obviously) then we would expect the market to continue its momentum induced ramp up and peter out in a few months.
Magazine Cover Indicator
Business Week magazine is probably the quintessential magazine cover indicator provider so it is exciting to finally see something like this weeks cover image: an ostrich which has its head buried through the sand to only come back up through another hole and stare back at us. Also notice that the artist added a sun breaking through dark clouds in the background. What say ye? Lets hear from the art critics, er.. I mean the contrarians!
Strategists, Greybeards and Hedgies
Let’s take a moment to count the worthy experts who are still non-believers in this rally: Paul Tudor Jones II, who runs Tudor Investment Corp., the $10.8 billion hedge-fund is an unavowed bear and identifies the recent market recovery as simply a “bear market rally. Doug Kass (of Seabreeze Partners) was correctly bullish months ago and is now telling us to lighten up and to not expect much going forward. David Rosenberg doesn’t think this is a lasting rally and he continues to be worried about deflation. Finally, Bob Janjuah, global strategist for Royal Bank of Scotland who has the distinct honor of not only calling the bear market but also the spring rally. He is now telling clients to sell equities and buy German 10 year bonds because he expects the March lows to be tested and even penetrated.
Arrayed on the other side of the see-saw are Soros, who believes that we have averted a major crisis and are climbing back; Faber, a natural born bear who has shed his fur for some horns, at least temporarily - but he also warns that an ever bigger reckoning will be upon us soon enough; and finally, Greenspan (who we talked about last week).
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