Here is this week’s sentiment overview:
In a surprising move, the retail US investors, as tracked by the AAII weekly sentiment poll, have become significantly less bullish. This is surprising because the usual pattern is for sentiment to match the market higher. But this week those expecting higher prices fell to 32.4% - almost matching the number expecting lower prices, 34.7%.
Source: Testing the Wall of Worry
As you might expect, this is slightly bullish for the market going forward. For the details of the historical study see the above link.
In contrast to the retail investors, stock newsletter editors, as tracked by the Investors Intelligence survey continued to become even more bullish this week. Almost 49% are expecting higher stock prices while only 20.5% are bearish. The rest (28.4%) are awaiting a correction. Right now there are 2.40 bulls for every bear. At the start of the year this ratio was even more extreme, above 3:1.
Daily Sentiment Index
The average DSI for this week for the S&P 500 index is 81% - again, just like last week, that is high but not extreme. For the NASDAQ it is slightly lower at 79%.
The highest bullish readings in the DSI right now is for the US dollar at 88% - not surprising since the green back has been on a rampage recently. At the other extreme stands the British Pound with a paltry 7%.
Ned Davis Crowd Sentiment
According to NDR their proprietary “Crowd Sentiment Poll” which is made up of several individual sentiment measures is now at “Extreme Optimism”. During the recent market correction in February this measure was at the other extreme, registering “Extreme Pessimism” so within a very short period of time things have changed dramatically. Hopefully I’ll write a bit more about the Crowd Sentiment Poll in the coming week.
NAAIM Survey of Manager Sentiment
In last week’s sentiment overview we looked at this relatively new sentiment indicator because it was at a point of extreme optimism. Since I shared with you a chart of the average NAAIM survey, this week I decided to contrast it by showing the mean NAAIM survey compared with the S&P 500 index:
But as you’ll notice from the above chart, we’ve been here and higher. For 7 weeks the median was at 100% (from November 2006 to January 2007). During that time the S&P 500 cleared the resistance at 1325 which had marked the previous swing top on May 2006. From then on it was smooth sailing with a clean uptrend that lasting until February 2007. My point is that the NAAIM can go to extreme and stay there for a prolonged period of time.
Also, it is logical and to be expected for managers to get bullish and stay bullish as the stock market climbs. What is much more instructive is how managers react when the market takes a tumble, do they jump off or persist?
We saw a very good example of this in 2007. In late August 2007 correction, most jumped off as the NAAIM average scraped the bottom at -2.11% and the median fell to 5% - but later in November 2007 the S&P 500 fell again, almost touching 1400. This time money managers were tenaciously bullish. Only a few giving up because allocation at the deepest part of the correction was +51% average and +58% median.
This time around many were not scared and had gleaned the lesson to “buy the dips” but that was the wrong lesson as it turned out to really be just a lull before a major storm.
Consumer Sentiment Surveys
According to a recent study conducted by Xavier University on the “American Dream”, the average American is pessimistic about their future.
Of those surveyed, 68% believed that achieving the “American Dream” will be more difficult for their children. And 58% believe that the US is in a downward trajectory, losing its “super-power” status in the long term. The perma-bears will find much to gloat over in the study and the perma-bulls will say that from a contrarian perspective it is always darkest before the dawn. The 1970’s was also a time of gloomy pessimism. You can download the whole survey from the previous link.
The other consumer sentiment survey is the ABC News Consumer Comfort Index. It ticked down slightly this week to - 44%. The index hasn’t been positive since March 2007 but it had been climbing higher from February’s low of -50%.
Yesterday I shared a chart showing the cumulative inflows into the two major asset classes: equities and fixed income. For the details, see: US retail investors love affair with bonds continues.
A reader noted that the data from the ICI does not include ETF inflows and that this could potentially be misleading since ETFs have become very popular. According to AMG Data, February’s equity inflows were $2 billion and excluding ETFs $241 million. So there is clearly a significant allocation via ETFs.
The real question though is whether the fund flows for equities and bond funds through ETFs cancel each other out. That is, if we have a similar favoritism towards bond fund ETFs then we again end up where we started. I’m going to research this a bit more and if I find anything worthwhile I’ll share it.
In the hedge fund sector, event driven funds are receiving the most money from institutional investors. According to TrimTabs/BarclayHedge there was $3.1 billion directed to funds that focus on mergers and acquisitions (shorting the acquiring company and going long the take-over target). The return of M&A is a consequence of relatively cheap valuations, bulging balance sheets and the acceptance of risk (once again) on Wall Street.
The behavior of market timing traders at the Rydex funds is a good indicator of speculative fervor. Recently we looked at how they quickly abandoned gold stocks - by the way, they’ve continued to shun that sector.
Jason Goepfert of SentimenTrader follows the Rydex traders quite closely and has created an interesting index to track their asset flows. He tracks what percentage of the many individual sector funds in the Rydex family are above their 50 day moving average. This is similar to how we look at how many stocks in the S&P 500 index are trading above their 50 day moving average.
When the vast majority of sectors see inflows above their medium time frame, this reflects a tendency in investors to take more risk. Not surprisingly, such extremes are matched with market tops (with a few weeks lag, at times). This indicator gives signals fairly rarely. We’ve only seen 7 in the past 10 years. There was a signal in January before the correction and we just got another one.
Taking a look at the option traders this week we find them slightly less bullish than before but still overwhelmingly optimistic about the market.
The 10 day moving average of the ISE Sentiment (call put ratio) fell from 203 to 193 this week:
Similar to the ISE, the CBOE equity only put call ratio ended the week at 0.6 and the 10 day moving average closed at 0.545 - the lowest point for the short term moving average was reached on last Thursday, March 18th 2010. Since then option sentiment has ameliorated but it is still at depths which are rarely seen. And needless to say, correspond more to tops than to anything else.
Here’s a chart comparing the 10 day moving average of the CBOE equity only put call ratio with the S&P 500 index:
When the put call ratio is lower than 0.55 - implying that for the past 2 trading weeks option traders have bought almost twice as many calls as puts - with a short lag the equity markets either react by treading sideways or falling.
The most recent signals were in mid-October 2009 and January 2010 - and of course, last week.
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