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With the market pushing ahead into new highs for the year, here is this week’s sentiment overview:
The average retail investor in the US, as measured by the weekly AAII sentiment survey was less bullish this week: 35.4% down 9.9% points from last week. Those that abandoned the bullish camp were evenly split between undecided and bearish: neutral at 34.8% up 5.3% points and bearish at 29.9% up 4.6% points. Since the long term average for bullish sentiment is 39% we aren’t seeing a very lopsided position here.
ChartCraft’s measure of newsletter editor sentiment showed slightly more bulls: 46.1% and slightly less bears, 21.3%. The rest, 32.6% are looking for a market correction. Putting those numbers into historical context, once again, we find that this measure is stuck in “no-man’s land”.
Daily Sentiment Index
The DSI for the S&P 500 index hit a high of 84% twice this week on March 17th and 18th. The 5 day moving average closed at 81%. While we’ve seen this metric hit higher extremes, this is clearly a sentiment level that has previously corresponded to market tops.
NAAIM Survey of Manager Sentiment
This up and coming sentiment survey is flashing a bright red light for the market. As of this week, active money managers are as bullish as they were in October 2009:
But the chart above is showing the mean (or average) market exposure. If we instead look at the median, which some would say is a superior statistic, then it is even more extreme at 95% net long. This is the highest level of bullishness going back to… you guessed it… October 17th, 2007 - when the last cyclical bull market topped out. But keep in mind that we saw this level of bullishness several times before the market peaked: in early 2007 and late 2006.
Interestingly enough, the median jumped higher from a low of 30% in mid-February’s when the correction ended. So within a very short period of time active managers have been conditioned to not only buy the dips but to bet the farm. To make this situation even more damning, this week’s standard variation of the NAAIM survey answers is very low - implying that respondents have a shared consensus and are remarkably confident in their bullish stance. Needless to say, all of this is a powerful cocktail for contrarianism.
Hulbert Stock Newsletter Sentiment
The HSNSI measures the average exposure to equities among a group of market newsletters that try to time the market. This week it was at 56.20% implying that market timers were suggesting to their clients that they go long the market with a little more than half their portfolio.
That is not only below the January high levels (65.2%) but it is also slightly lower than what we saw at the beginning of the month (62.8%). So all in all, newsletter editors have not taken a shine to the bounce higher from February and more interestingly, they have not been impressed enough by the breakout above January’s S&P 500 levels to significantly increase their market exposure.
Merrill Lynch Survey of Fund Managers
Turning to institutional investors, the recent ML survey of managers covered 207 individuals overseeing almost $600 billion in assets. It shows that institutional investors have recovered from the February correction and put their cash to use buying stocks. They continue to be concerned with European sovereign debt risk and have therefore gravitated towards the US market. Compared to last month’s 1%, this month 19% of respondents are overweight US equities.
Japan is also gaining some serious fans with 6% of asset allocators indicating they are overweight Japanese equities - this is the highest level of overweight since August 2007. European equity exposure has been pared from banks and channeled to cyclical sectors. While still popular, institutions are also reducing exposure to emerging markets. In March only 33% are overweight allocations to emerging markets compared to 53% in November 2009.
Volatility continues to melt lower, falling below last week’s level to 16.97 - the last time the VIX was lower was in mid-May 2008. The S&P 500 index was trading north of 1400 and all hell hadn’t broken loose. The VIX is calculated based on the implied option volatility; taking into account the option traders are positioned, it is reflecting an eery calm over the equity markets right now.
According to Jason Goepfert of SentimenTrader, the ratio of leveraged bulls/bears in the Rydex family of funds has spiked to 2.5 - implying that retail market timers have placed two and a half times as much money in funds that are long as funds that are short. The previous time this level was breached was at the short term market top in January 2010.
Option traders continue to press their luck by leaning into calls and avoiding puts, especially when it comes to retail traders that are buying calls as opening transactions (as opposed to complex combinations of calls and puts). According to the ISE Sentiment index, the highest call buying this week occurred on Wednesday, March 16th 2010 when 234 calls were bought for every 100 puts.
Not surprising since this was the day that we broke decisively through the previous resistance level. But as a result, this pushed the already high 10 day moving average to a high of 203 before it fell slightly to finish at 201.2 for the week. So basically for the past 10 days, on average, retail traders have been buying slightly more than twice as many calls as puts.
The last time it was this lopsided was in mid January as the market was topping out. To see a chart of the ISE, check out last week’s sentiment overview.
The CBOE put call ratio shows a similar, although less extreme picture of option sentiment. According to the more traditional measure of option activity, traders have bought slightly less than half as many puts as calls.
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