There’s quite a bit of data to go over so grab your beverage of choice before diving into this week’s sentiment overview:
The weekly sentiment survey from the AAII was little changed. Those expecting the stock market to be higher in 6 months lost almost one percent and dropped to 35.8%. Meanwhile the bearish potion fell even more (-6.7%) to hit 35.2%. So once again we are almost at a boring parity between the two sides.
The Investors Intelligence survey which measures the sentiment of stock newsletter editors was similarly boring this week. Both the bulls and the bears increased slightly from last week. The bulls are at 35.6% and the bears at 27.8%. We’ve seen a significant pullback in the extreme bullishness in the II at New Year’s but now it is basically in “no-man’s land.”
We haven’t discussed this up and coming sentiment indicator in a while. By the way, if you’re unfamiliar with this indicator, see my introduction to the NAAIM survey of manager sentiment.
As you can see from the chart below, the average money manager was heavily long the market at the January high. The shallow correction we had was enough to persuade them to give up almost all their exposure on the long side:
Daily Sentiment Index
A few readers have been asking me for an update on the DSI so here is a chart of the S&P 500 with its accompanying DSI reading. For more information on the DSI as an indicator and how to use it: An Overview of the Daily Sentiment Index.
Source: RMG Wealth Management
Hulbert Newsletter Sentiment
According to the HSNSI which tracks the newsletters which attempt to time the stock market, the average newsletter is significantly less bullish now than last month. At the start of the year the HSNSI stood at 65.2% but after the correction that has dropped to just 20.3%.
To give you some perspective, 70% is the ceiling or “extreme” in historical context for this indicator. On the flip side, a level of -20% is very oversold (this is when newsletters are recommending a net short exposure).
ABC News/Washington Post Consumer Confidence
According to this indicator, the average US consumer is still very much in economic pain. The weekly consumer comfort index is -49 for the week of February 14th 2010. That is in line with the past few months and constitutes the largest stretch of negative sentiment for this indicator going back to the 1980’s.
Source: Gluskin Sheff
I haven’t shown the option sentiment indicators which we usually go over every week because there was really no significant change from last week. Both the ISE sentiment index and the CBOE put call ratio were almost unmoved. For the really curious, you can check out the previous long term charts here.
If there is one fly in the ointment of “buy the dip” it is the propensity of option traders, and especially small or retail traders, to ignore protective puts. At the January 2010 highs we saw them completely ignore risk by eschewing the historic minimum of put buying. And then as the market corrected, they seemed to have reluctantly shuffled over and bought some puts but nearly not enough as I’d like to see to be able to confidently label this just a correction. But then again, perhaps it is too much to ask for all the stars to align perfectly.
Junk Bond Exodus
If you wondered what it takes to bring back some semblance of reality into the global markets, now we know. Apparently, all it takes is the risk of sovereign debt default from Greece (and in whispers, Portugal, Spain, Italy, Ireland, etc.) coupled with bright minds like Albert Edwards, the strategist at Societe Generale opining on the inevitable break up of the Euro. And bond investors suddenly discover the r-word. No, not retarded. Risk.
According to Lipper, investors are rushing out of high yield bond funds at the fastest pace since September 2005. In the most recent week they withdrew $984 million from US high yield bond funds - that is the largest net outflow in one week in more than four years and enough to push the four week rolling average down into net outflows (something we haven’t seen since March 2009).
As well, January saw the largest drops in junk bond prices pushing the spread between high yield bonds and “risk free” US Treasury bills from 100 basis points to 700 basis points.
Thanks to the “keep drinking to avoid a hangover” monetary policy philosophy adopted by most central banks, investors are parched for yield in a zero interest rate environment and have chased returns with little concern for risk. Flows into bond funds have outstripped all other classes but the fixed income thesis got a huge blow as net asset values for junk bond funds tracked by Lipper fell by $1.6 billion due to price declines.
While the high-yield bond sub-sector is getting rocked hard from the sovereign debt concerns across the pond, high quality corporate bond funds as well as government bond funds are continuing to receive consistent love from US retail investors. According to the latest ICI data for the week of February 10th 2010, they poured another $6.8 billion into the already sky-high pile of money they’ve invested in fixed income since the March 2009 equity market bottom.
Equity Mutual Fund Exodus
It doesn’t look like the junk bond stresses in fixed income are going to be enough to make US investors abandon their mass exodus from equities to fixed income. Not only has the inflows to bond funds continued with the same ferocity we’ve seen in the past few months, they are yet again withdrawing money from equity mutual funds.
According to the latest ICI data (for the week of February 10th 2010) investors withdrew $5.1 billion from US equity mutual funds. Even foreign equity mutual funds which had been spared, for the most part, saw withdrawals of almost half a billion dollars.
While the shallow correction we just had was rather foreseeable it was enough to spook a lot of newsletters and money managers. But it wasn’t enough to negatively affect the pattern of insider activity. In fact, not only did corporate insiders not accelerate the selling of their company’s shares as the market fell, they actually slowed down the pace of selling and increased their buying.
According to Argus Research, in mid January 2010, insiders sold 5.15 shares for every 1 share they bought. A month later they sold just 2.42 shares for every 1 share bought. According to this metric, what we just witnessed was a healthy and normal profit taking correction instead of a crack in the cyclical bull market.
Things are even more bullish for small cap stocks. According to Insiderscore.com, corporate insiders from small capitalization companies (Russell 200 index constituents) took advantage of the recent price decline to back up the truck. The first week of this month saw the biggest burst of insider buying since March 2009.
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