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