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Here is this week’s sentiment overview:
Let’s start this week’s overview with the Investors Intelligence measuring newsletter editors optimism. I referred to it briefly yesterday when I mentioned several technical analysts points of view.
Stock newsletter editors are usually a rather bullish bunch because doom and gloom, while being accurate at times, isn’t very popular. We almost always see more bulls than bears in the II weekly numbers and to hit an extreme bullish reading, we look at the bullish camp being 3 times larger than the bears.
Within that context, this week’s reading of 32.6% bulls and 34.8% bears does indicate capitulation by stock newsletter editors. The bull/bear ratio is 0.94 - the lowest since April 2009 as the market was just climbing out of the crater left by the 2008 bear market.
American Association of Individual Investors
In contrast, this week the retail investors bolted back to the bullish side. The AAII bulls had a huge 18.4% point increase in bullishness to reach 39.4%. What the bulls gained, the bears lost, moving from last week’s 57% to end up at 37.8% this week. As a result, the bull ratio went from 27% to 51%:
Historically, it is rare to see the AAII bull ratio fallen below 30% and recover above 50% the next week. In fact, going back over the whole history of this indicator, every time it has fallen so much, it has taken it at least 2 weeks to recover - with one exception. That was on April 20th 2005 (not shown on chart) when the bull ratio jumped from 28% to 53% in one week. The increased volatility on the tape is translating into major volatility in the sentiment measures.
The fact that retail investors have renewed their optimism so fast will undoubtedly lead many to conclude that it is a negative sign for the market. But based on a quick historical study done by Jason Goepfert, it isn’t all that conclusive. With a 71% probability the market is slightly higher (+0.7%) 2 weeks later and going forward to 6 months later, it is a coin toss - basically no edge at all.
Keep in mind that the bull ratio is still under where it was in mid-June 2010 (58%) when the S&P 500 topped out and rolled over. As well, the current bull ratio is right around the 10 year average.
Hulbert Stock Newsletter Sentiment
Another measure of stock newsletter editor sentiment confirms the Investors Intelligence data. Even though the S&P 500 bottomed out in early July and went on a rampage almost hitting 1100 (intra-day high) the Hulbert Stocks Newsletter Sentiment (HSNSI) actually fell indicating that editors were so skeptical of the rally they were recommending to their clients to go even more short.
Last Friday the HSNSI fell to -6.5% and on Tuesday, even lower to -13%; meaning that newsletter writers were suggesting their clients actually be short the market with that portion of their total portfolio. The previous times that this sentiment indicator has been more pessimistic was on March 2009 -20% and on March 2003 when it fell to -19.2% (it fell much lower in late 2008, -43%).
NAAIM Survey of Sentiment
Similar to the AAII survey which jumped back into mild optimism, the NAAIM survey of manager sentiment quickly recovered from its recent low of 13.5% to 50%. Here is a zoomed in chart showing the data from January 2009 up til this week:
It is interesting how the amateurs’ and professionals’ sentiment mirrors each other. Just like the AAII, the NAAIM sentiment recovered in mid-June, along with the market, hitting 54% on June 23rd 2010.
Many are calling today’s decline in stock prices a consequence of the massive gap between the expected (74%) and actual number (66.5) from the Reuters/University of Michigan Consumer Sentiment survey. Personally, I find all such explanations of stock prices to be meaningless since if they had gone up, the interpretation would have been that stock prices go up, in spite of the poor consumer sentiment.
Much more realistic is the explanation that prices had simply gone up too hard and too fast. In any case, this drop gave us the second largest gap between reported and estimated consumer sentiment. The largest was October 17th 2008. The fall, in any case, takes us back down to the level last seen in July and August 2009.
Keep in mind that this is a preliminary report based on 300 interviews. The final report will come in a few weeks and based on interviews with another 500, it will revise the number.
BofA Merrill Lynch Survey of Fund Managers
According to the Bank of America-Merrill Lynch survey of fund managers for July, a net 12% of managers believe the global economy will weaken in the next 12 months. It certainly seems that asset managers are hunkering down for a storm with allocations to the relatively safe pharma sector rising to levels last seen in March 2009. Even more amazingly, managers are more concerned about the outlook for US stock prices than at any point since November 2006.
As they underweight US equities, managers are scooping up emerging markets and Eurozone equities. A net 34% of global asset allocators are overweight emerging markets, up from 19% in May. But in general, managers have moved away from equities and into bonds. Those overweight equities has fallen to a net 11% from 30% in May. Meanwhile, those underweight bonds have decline to a net 15% down from 29% in May.
I find it remarkable that the professional asset manages are as a crowd mimicking the retail investors in moving towards bonds. Especially since in the same survey the acknowledge that equities are relatively cheap and bonds expensive. According to the survey, the perceived valuation gap between equities and bonds is at its widest since 2003.
NFIB Small Business Optimism
For 18 consecutive months, from October 2008 until March 2010 the NFIB Small Business Optimism index has been below 90. It barely rose above that level for April and May only to fall down again (89) below it in June:
The persistence of the index below 90 is unprecedented in the history of the survey. The index and its components are pointing to a very weak economic recovery.
The “Hiring Plans” sub-index is wallowing at an average of -0.5 for the first six months of 2010. As way of comparison, the 12 month average Hiring Plans was 14.4 for 2005, 14.6 for 2006 and 13 for 2007. So the jobs outlook from the perspective of small businesses (who are purported to be the engine of job growth in the US) is still very dismal.
Mutual Fund Flows
As we’ve been observing for a long time now, US retail mutual fund investors are continuing to ignore the equity market in favor of bonds. The data for the first week of this month shows an outflow of $4.1 billion from US equity funds, $112 million from foreign equity funds and an inflow of $6 billion into bond funds. For a chart of the monthly mutual fund flows, see last week’s sentiment overview.
Hedge Fund Flows & Sentiment
The good news is that according to Hennessee Group, hedge funds took in $4 billion of new money in May 2010. The bad news is that industry assets fell to $1.58 trillion - the first monthly decline since July 2009. It would seem that the average hedge fund was rocked by the volatility and decline from the April 2010 highs. But they did manage to earn their hefty fees since as a group they did outperform the equity indexes. According to BarclayHedge, hedge funds tracked by them returned -3.2% for the month of May - the worst performance since October 2008.
Perhaps more interesting is a survey by TrimTabs which shows only 24 out of 127 respondents (18.9%) as being bullish on the S&P 500 index and 37% were bearish. This is slightly more optimistic than last month when 52% were bearish and 16% bullish. As well, almost half (46%) are in fact worried about the sovereign debt crisis in Europe continuing and taking down Spain with it. According to the Bank of America Merrill Lynch survey (see above) hedge funds have reduced their net equity exposure to the lowest level since March 2009.
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