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Here is the sentiment summary for the week following the infamous “flash crash”:
In last week’s sentiment overview I stressed that we would have to wait until this week to see the crazy market volatility reflected in the various sentiment surveys that we watch since the surveys that week were completed before the “flash crash” happened. The results are in and we can deconstruct them:
According to the AAII weekly survey, we saw a small drop in bullishness (from 39% to 36.6%) and an increase in bearishness, from 28.6% to 36.6%. This brings the bull ratio to exactly 50%. Although the AAII results reflect a reduction in bullishness, for the most part it isn’t very helpful since the ratio is still caught in neither extremes.
To put the bull ratio into perspective, last November it fell to just 28% - implying that bulls made up less than a third of the total of bulls and bears. And at the other extreme, the last weekly survey of the year for 2009 had the bull ratio at 68% - just in time for the January 2010 correction.
For 3 weeks in a row, from April 20th to May 4th 2010, the II bull bear ratio hovered around 3:1. I repeatedly pointed out that usually we had seen this correspond to market tops. And this time around it was no different.
But after the drubbing last week, newsletter editors have suddenly jumped off their bullish bandwagons. This week, the Investors Intelligence bulls fell sharply to 47.2% from 56.0%. The bears recovered from the six week streak below 20% by rising from 18.7% (last week) to 24.7% this week.
This brings the bull/bear ratio to 2:1. This is much lower than what we saw at the top but similar to the AAII survey it is now mired in no-man’s land. So from a contrarian point of view it offers us little. But we do benefit from knowing that in light of the losses sustained from the sharp decline last week, newsletter editors did not persist in their bullish tendencies but instead quickly threw in the towel.
Hulbert Newsletter Sentiment
Turning to the other measure of stock newsletter sentiment, the Hulbert Newsletter Sentiment indexes are showing an even more pronounced exodus from the long side as the average market timing newsletter editors reduce their exposure in reaction to the sharp drop in the markets last week.
According to Mark Hulbert, the Hulbert Stock Newsletter Sentiment Index has dropped from a high of 56% on April 12th 2010 to just 20.5% as of today. This means that the average stock newsletter that tries to time the market is now recommending that their clients have long exposure to the market equivalent to 20.5% of their portfolio. This is a sharp decline and shows that there is little complacency or persistence in bullish sentiment.
We see an even more pronounced capitulation within the Hulbert Nasdaq Newsletter Sentiment Index which measures the market timing newsletters who focus on the Nasdaq market. This group hit a new high of 80% long exposure at the end of April. Since then the HNNSI has dropped to just 3.2%. This total capitulation again shows that we have strong contrarian reasons to expect the market to rebound. But I would caution against expecting further short term gains since we’ve already seen a sizable bounce from the mini-crash lows.
This survey of active money managers is confirming the capitulation thesis we’ve already seen from various sentiment surveys. The NAAIM Survey of Manager Sentiment fell this week from 68% to 42%. The recent high was reached on April 5th 2010 at 86%. Ideally I’d like to see it fall at least to 30% where the February correction ended.
Daily Sentiment Index
Checking in with the Daily Sentiment Index (DSI) we find it at just 37% bulls. It has dropped sharply since reaching a high in mid-April where the 10 day average peaked at 87%. The current reading shows a rapid decline with the 10 day average at 67% and the 5 day average at 57%. The February correction ended with a corresponding DSI low of 40% - slightly higher than the current DSI.
Joe Battipaglia, the infamous permabull is now not sure the market can break above its recent highs. I don’t want to misrepresent him since he is lucid enough in his explanation. It sounds familiar enough, being an echo of what I wrote yesterday about China.
Basically he worries that the Eurozone sovereign debt crisis is far from over, that China is fighting an inflationary situation and that the US is in no position to take up any slack. So any loss of footing by China will be the third shock and possibly bring things down to a scary place.
Battipaglia isn’t outright bearish but rather believes that we are mired in a trading range between 9-11,000 on the Dow Jones Industrial. Still, having the reputation that he does, I can’t help but use him as a contrarian indicator of sorts. The fact that the recent volatility was enough to impel him to move from a bullish posture to a more neutral one is noteworthy.
Here is the interview:
The activity from corporate insiders isn’t really actionable within a short time frame, yet I think it is still useful to gauge whether they reacted to the market volatility by doubling down or by taking their chips off the table. According to a recent Vickers Weekly Insider Report based on data from Argus Research, in late April 2010 corporate insiders stepped up their selling to push the ratio of sales to buys to 6:1 - even higher than at the market highs in mid-April. For the first week of May 2010, corporate insiders dramatically reduced their selling to bring the ratio to 3.46:1. This isn’t a total capitulation but it is in line with the average selling ratio we expect (since insiders usually sell close to triple what they purchase).
Initial public offerings are a good gauge of market froth. During the bear market and ensuing credit crisis, the IPO market entered a drought that has now slowly abated. This simply returns us to a more normal market condition.
Last month, on April 27th 2010, we saw 7 IPOs in a single session - the most since November 2007. But while IPOs are certainly making a comeback, investors are too choosy to buy anything at any price. Of the 30 or so IPOs that have come to market, about half have been able to price above their price target range. So we are not seeing much froth (yet).
Hedge Funds Flows
According to TrimTabs/BarclayHedge, hedge funds continue to receive respectable asset flows. For March, hedge funds received net inflows of $7.6 billion. This is down from February’s $16.6 billion inflows. TrimTabs comments that hedge fund investors are favoring more riskier vehicles as these deliver higher returns.
Mutual Fund Flows
According to the ICI the first week of May saw outflows of $2.2 billion from domestic equity mutual funds in the US. This outflow for just one week almost reverses half of the inflows for the month of April. As usual, bond funds receive the bulk of the inflows - $8.5 billion. Since January 2007 bond funds have seen net inflows of $641,212 billion dollars while domestic equities have seen a net total outflow of $209,170 billion.
According to TrimTabs, $8.2 billion flowed out of US equity mutual funds last week. This represents such a very tiny fraction of the total assets held in equity mutual funds that we can’t say the “flash crash” caused any significant number of retail investors to sell their stock holdings. My hunch is that since the secular shift towards bonds has been going for a while now, those who have an equity position will probably hold it in the face of everything except the most severe volatility and/or loss.
Option Traders Sentiment
Option traders continue to pull in their horns from the extreme bullishness that we saw in mid-April 2010. According to the CBOE put call ratio, option traders are as pessimistic as early March 2010, just as the S&P 500 was recovering from the February correction:
The most interesting data for me was the drop in the put call ratio on Monday (May 10th 2010) when all the major indexes staged a huge one day rally. The put call ratio fell from 0.80 to 0.63. Option traders were skeptical of that sharp reversal higher. We saw a very similar development on the ISE Sentiment index for Monday:
While the S&P 500 index rose by 4.4% the ISE call put ratio was 134. It was a tiny drop from last Friday’s 139 but it was the lowest the ISE Sentiment index has been on a daily basis since March 2nd 2010. The 10 day moving average of the equity only ISE Sentiment index continued to drop to 160 (from a high of 249 on April 15th 2010).
I’m comparing and contrasting the ISE equity only and all securities data. If I find anything useful, I’ll share it with you next week. Until then.
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