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Sentiment Overview: Week Of February 5th, 2010 at Trader’s Narrative

We’ve had some interesting developments in sentiment this week:

Sentiment Surveys
The American Association of Individual Investors survey results for this Thursday February 4th show only 29.2% in the bullish camp and an growing bearish camp (43.1%). Fear increased by approximately the same degree as optimists fell and pessimists increased by about 6% points from just a week ago when they were almost at parity. As you’ll recall from the sentiment overview not that long ago, we started the year off with the AAII at “23% bears and a whopping 49% bulls”. So we’ve let a lot of air out of the complacency that was evident then. But we haven’t swung to the other extreme (yet). To see what the other extreme looks like, check out the chart from the March 2009 sentiment overview.

The AAII members changed their asset allocation as well. We took a look at this chart last month showing a shift to equities to a degree that surprisingly approached (but did not reach or surpass) the levels which accompanied the 2007 market top. This most recent data shows a slight backing away from equities - from an average of 64% of total portfolio to 57%:

AAII asset allocation Feb 2010
Source: SentimenTrader

The interesting development is that the money that was freed up from this shift out of equities went into bonds (not cash, the other option). We’ve already looked at several indicators that there is a bubble in fixed income. And this is another data point which points to the same conclusion. Of course, it merely reflects what we’ve already seen in the tsunami of fund flows directed at the bond market.

Investors Intelligence
In a similar way, the Investors Intelligence weekly survey of newsletter editors sentiment has stepped back from the all time lows in bearish sentiment that we saw at the start of the new year. It is hard to believe it was little more than a month ago that there were a miniscule 15.6% Investors Intelligence bears - a new low for the 22 year old sentiment indicator!

investors intelligence sentiment survey OEX chart Feb 2010
Source: Schaeffers Research

While bearishness has backed off from that historically notable level and bullishness has also ameliorated, there is a wide gap between them. This 38.9% portion are those expecting a correction. Again, similar to the AAII indicator, this sentiment indicator is not even close to showing real fear or panic or even serious concern.

Michigan Consumer Sentiment
Today’s nonfarm payroll numbers for January show a decrease of 20,000 but an increase in the official unemployment rate to 9.7%. There is so much made of these data releases but the real truth of the matter is that things are the underlying reality is much more complicated than can be simplified to a numerical end result. Especially since nonfarm payrolls are always revised after the fact.

As before, TrimTabs is claiming that the real numbers are much, much worse. While I don’t doubt that things are tough out there for the US consumers we are seeing some beams of sunshine. Surprisingly the University of Michigan consumer sentiment index continues to steadily improve. For January it was 74.4 (up from 72.5 in December 2009) and a two year high:

Michigan Consumer Sentiment Feb 2010

Mutual Fund Asset Flows
The shift away from equities and into fixed income continues unabated. According to data from ICI, domestic equity funds took in $2.2 billion last month while bond funds received $29.7 billion of inflows. More or less, we’ve been running a ratio of 1:10 for some time. And it seems that this is now a secular shift as the average investor recalibrates their asset mix. In keeping with the trend we’ve noticed from last year, emerging markets are getting slightly more love from investors with an inflow of $10.1 billion in January 2010.

Option Sentiment
Option traders were a very bullish bunch back in December 2009 and January 2010. We were seeing some astonishingly high call buying across the spectrum back then; equally from institutional and small retail traders. During this correction a lot of that giddiness has disappeared but things are still fairly optimistic in option land.

Turning to the CBOE put call ratio (equity only) chart, you can see that we are off the lows and heading steeply higher. But on a nominal level, we’re not even close to seeing the high put buying (green zone) which has marked previous important lows in the stock market:

cboe equity only put call 10 day moving average Feb 2010

The ISE Sentiment which more accurately tracks retail option traders is showing a similar change in tone.The 10 day moving average of the call put ratio (equity only) is down to 160. That is the level it was back in mid December 2009 - just before the S&P 500 embarked on the last leg of its run up:

ISE sentiment 10 day moving average Feb 2010

During the March 2009 bottom, the ISE sentiment average was at 134 so ideally I’d like to see it move at least down to that range. Also, I’m watching the daily numbers to see if we can see a day or two with call put buying at or below 100. We haven’t seen that since June 18th 2009 (when it fell to 92). From then to today we’ve consistently seen more call buying which points to a generous amount of complacency.

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6 Responses to “Sentiment Overview: Week Of February 5th, 2010”  

  1. 1 Jim

    Babak, I found the Rydex Precious Metals fund asset levels interesting this week. On Thursday, it fell to its lowest level since December 2008, a pretty impressive feat considering that the benchmark HUI was up 45% since those days.

  2. 2 Doctor Stock

    Gotta love emotion… I think our perception of the market is critical to defining direction.

  3. 3 Babak

    Jim, thanks, that is certainly interesting. But is this relative to total assets or just in nominal terms? although you’re only going back a year or so it still is helpful to express things like this relatively so we compare apples to apples.

  4. 4 Jim

    Babak, that is in nominal terms. If you adjust for the fund’s NAV, the recent asset levels look even more contrarian bullish to me.

  5. 5 Bill Underwood


    Having been a financial advisor for over 30 years (and making my fair share of mistakes - the most significant which were under age 40), I have a few obversations that I believe are worth noting.

    1. Without being totally disrepective to the authors of a sampling of the comments, it is imperative to note (irrespective of the government and small business) that coporate bonds would not be safe if the companies behind them were not successful (profitable).

    2. Before making recommendations of any type of investment there are numerous factors to be considered:

    A. Time period before funds are to be utilized

    B. Product liquidity

    C. Interest, short and long term caital gains.

    D. Mangement tenure if a mutual fund, ETF or variable annuiy subaccount - giving creditability to time frame chosen

    F. Volatility

    G. Taxability (A guranteed 30% gain or loss for most investors)

    There are far too numerous additional items to mention. I realize that any opinions are subject to negative comments, however, your statistics are not inconsittent with the flows of money over volatile times. Those who are familiar with the subjective portions of investing (fear and greed) know that they are a primary driver of decision making by the vast majority of the public. Previous booms in commercial real estate, technology and others will always exist.
    I am quite certain that a fair share of the people (6.5 billion ) on this earth will continue to consume coffee, coke, bread, butter, meat and potatooes etc, on a daily basis. Unlike 15 years ago, I would argue that some electronics (ie. cell phones, smaller computers and games etc.) have become much like commodities as the “accelerated rate of change” dominates our lives.

  6. 6 Babak

    Bill, I’m not sure what your point is. Corporate bonds? when did Jim mention bonds? the rest is just as puzzling. Maybe you meant to post this under a different discussion?

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