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Sentiment Overview: Week Of July 30th, 2010 at Trader’s Narrative

Here is this week’s look at the sentiment landscape:

Sentiment Surveys
This week’s AAII weekly survey of retail investor sentiment brought us to almost double the low point we saw at the start of this month. Currently 40% of those surveyed expect higher US stock prices in the next 6 months (there were just 21% in the first week of July 2010). In contrast, 33% are bearish. This pushes the bull ratio up to 55%, the highest it has been since mid-June 2010:

AAII bull ratio Jul 2010 update3

The latest Investors Intelligence poll has the bulls at 38.2% from 35.6% last week. The bear’s share has moved down to 34.9% - where it has been for the past few weeks. These readings are a slight increase in the bull-bear gap but overall, they are far from dangerous (through contrarian analysis).

Active Investors
According to a recent survey conducted by Fidelity Investments, market outlook varies among active traders and vs. retail investors. Fidelity’s criteria for classifying the respondent as “active” was those who trade at least 36 times within a year.

Sentiment among these more active market participants is decidedly more optimistic. Among them, 36% believe the current weakness to be merely a short-term setback. 43% of them plan to reduce their cash levels and just to show that human nature rarely changes, a whopping 67% expect to beat the market in the next 12 months.

As we’ve seen in the mutual fund flow data, their more passive, “amateur” peers have decided to simply leave the stock market. Upon being asked what it would take for them to return, 83% said they would need at least 6 months of market stability. And among those, almost a half would like to see stable markets return for a whole year before putting fresh money into equities.

NAAIM Survey of Manager Sentiment
This week, professional money managers surveyed by the NAAIM have positioned their portfolios slightly more long with the average at an exposure of 50% (up from 45% last week and 13.5% in early July). For more including a chart, please see: Here’s the Fear! Almost at March 2009 Levels

Consumer Confidence
US consumer confidence continues to be abysmal. According to the latest Conference Board survey, consumer confidence slipped to 50.4 from 54.3 (revised) in June. This is the worst level since February 2010. But it wasn’t too much of a surprise since most were expecting it to come in at 51. Delving deeper into the sub-indexes, we find almost every single element of the survey betraying a weaker consumer.

For example, only 9% rate business conditions as “good”. Remarkably, this is lower than September 2008 (13%), during the most stressful days of the credit crisis. Those planning to buy a house fell to 1.9% (from 2% last month) and the lowest since December 2009. To find a lower level we’d have to go back all the way to 1982 (and the only other time in recent history the US had a “double dip” recession.

Bloomberg Professional Global Confidence Index
The latest Bloomberg Professional Confidence Index is for June, which was 36.63. This is down sharply from the high in April 2010:
Bloomberg Professional Global confidence index Jun 2010

Readings below 50 indicate that survey respondents have a negative outlook towards the global economy. The results for July 2010 will be released within about 10 days, at which point we will have another data point. My hunch is that it will be slightly lower than the June level.

Rydex Fund Flows
Rydex market timers who switch between funds to attempt to beat the market have recovered from their relatively pessimistic position at the start of the month to a more ‘normal’ posture:

rydex ratio Jul 2010

The only other interesting data point from Rydex this week is the sudden jump in assets in their Utilities Fund from $28 million to $150 million. This is really unprecedented (at least for me!) and it is difficult to guess what could be behind such a drastic change in assets. Obviously this is not the work of the usual herd of market timers but perhaps a hedge fund manager who got bored of the usual trading vehicles.

Mutual Fund Flows
In keeping with the observed trend for the past year and the recent survey cited above, retail investors in the US continue to pull money out of US equity mutual funds and sock it (and more_ away in bond funds:
equity bond fund flows Jul 2010

The data for the whole month is not available but it looks like July will deliver the 19th consecutive positive inflow for bond funds. And they are almost all heavy inflows averaging $30 billion a month.

Domestic equity mutual funds suffered almost $9 billion of outflows with foreign equity funds taking in a paltry $117 million. Since 2007 US mutual fund investors have invested almost $700 billion into bond funds while taking out almost $25 billion from equity funds.

Fund Flows (Short Selling)
According to TrimTabs, 8 of the 10 sectors saw net short selling with IT and Consumer Discretionary almost tying for the top place with +$1 billion net short selling:

net short sale US stocks by sector TrimTabs Jul 2010

Option Sentiment
Finally, looking at option put call ratios is relatively indeterminate with the CBOE (equity only) put call ratio at a 10 day average of 0.60 - this is relatively low compared to historical averages, indicating quite a bit of complacency.

We can see a similar picture emerge from the ISE (equity only) call put ratio which stands at 168. The equivalent put call ratio would be 0.59 - very close to the CBOE data.

However, if we look at the options data another way, a completely different picture emerges. According to the ever insightful Jason Goepfert, speculative call buying by small traders is extremely low. In fact, it is at one of the lowest levels for the past 5 years. Of course, this could get even more extreme. Needless to say, historically, when small traders have been this reluctant to anticipate a major rally, that is exactly what the market has delivered.

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3 Responses to “Sentiment Overview: Week Of July 30th, 2010”  

  1. 1 Ed

    As a speculative small traders, I have moved away from options and towards 2x and 3x ETFs. Commissions are smaller, the ETFs are more liquid, and I can get quotes easier than with options.

  2. 2 Mary

    a whopping 67% expect to bear the market in the next 12 months.

    ????? Should that be “beat”?

  3. 3 Babak

    Mary, Freudian slip! corrected it now.

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