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Hedge Fund Operational Due Diligence (follow link and submit comment)
On Tuesday, just as the market was poised for its rocket ride higher, ChartCraft’s Investors Intelligence survey of stock newsletter editor’s sentiment showed 26.4% leaning bullish and 47.2% bearish. That’s a pretty good level of pessimism but not nearly as much as we saw late last year when bearish respondents came in at around 55%. It will be interesting to watch next week’s numbers to see if there is a continued collapse in hope or whether the market’s recent bounce causes people to jump on the bandwagon again (as they have repeatedly during this bear market).
After last week’s historic AAII sentiment survey results, it isn’t surprising to see some push back. The bearish camp shrunk by 15% points to 55%. That’s still very high but no contrarian likes to see such a the sudden move in response to the rally we saw. The optimists rose 9 percentage points higher from last week to 28%. The survey was taken on March 12th, after Tuesday’s massive one day rally. Real capitulation would have been either a more timid move towards optimism or continued slide into further pessimism.
The options market continues to behave very strangely. After the spike high in the ISE sentiment, that option ratio calmed down a bit but it is still showing an elevated level of call purchases (compared to puts).
The CBOE (equity only) put call ratio concurs with a very low reading for the whole week. The averages (10 and 50 simple day moving average) are both stuck in the middle, not providing any real signal.
One measure of investor optimism is the activity in the “over the counter” market. Since it has less regulation and oversight, as well as smaller, riskier securities, it is a good barometer of investor sentiment. In the past, extremes of activity in the OTC market have marked the “blow off” stage. In a hurricane even turkeys can fly and in a bull market, the highest flyers are often the lowest quality OTC stocks. Right now the level of activity in the OTC market is extremely low. Lower than the 2002-2003 bear market low, lower than the 1998 crisis low. The lowest in at least a decade, in fact. If OTC activity had an EKG, it would have flat-lined. Which is good in a sense because it shows that we have wrung out every single drop of excessive speculative energy (at least in this corner of the market).
Corporate insiders continue to pour money into their own companies stocks with renewed vigor. We are now approaching the level of buying frenzy that we last saw in late November 2008. Although these are generally viewed as the “smart money” crowd, over this bear market, they have not shown the usual agility in timing the bottom. If the market continues to rally, they will have finally been proven right.
Mutual Fund Cash
The cash buildup in mutual fund portfolios continues. The estimate now is that almost 6% of the average equity mutual fund portfolio is made up of cash or equivalents. We need to “normalize” that to take into account different monetary conditions over time (see previous mention for more info).
We are now approaching the equivalent of the mid-1990’s for normalized cash holdings. This isn’t the extreme that we saw, for example, in the mid 1970’s or the early 1990’s. Both of those times coincide with a massive buildup of cash and a lasting market bottom. However, today’s level is enough to stoke a bull market - assuming the other ingredients are also there.
This could be caused by the general pessimism pervading Wall Street right now. And it could also be that the average fund manager’s hand is forced by the unforgiving onslaught of mutual fund redemptions. The fund flow data certainly shows that the average retail mutual fund owner has had enough and is cashing in (possibly at the bottom or close to it).
This week’s magazine cover indicator comes courtesy of The Economist:
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