Here is this week’s comprehensive look at market sentiment:
I was surprised to see this week’s AAII survey results showing an increase in bullishness (from 37% to 41%) and a decrease in bearishness (from 37% to 334%). While the magnitude the changes are small, it is the direction that has me confused. The market after all was declining consistently; so why then were retail investors continuing to see the glass as half full?
It is always dull when contrarian sentiment readings like the AAII are stuck at “mild” like they are now. This week’s bull ratio is 55% which is basically the average bull ratio since 2000 (56%). But while I was expecting a lower bull ratio and a serious capitulation from US retail investors, this doesn’t completely doom us to a waterfall decline. Historically, the market has held up remarkably well in similar circumstances.
In contrast to their retail clients, newsletter editors have been much more ready to abandon the long side. This week’s II bull bear ratio continued to fall, reaching 1.77. Optimistic newsletter editors declined from 47.2% to 43.8% and pessimists stayed the same at 24.7%. At this point we are approaching “correction” levels of pessimism. But we are still far away from truly cataclysmic doom and gloom. For that we’d have to approach and then pass the point of parity between bulls and bears.
Hulbert Newsletter Sentiment
According to Mark Hulbert’s gauge of newsletter editors, we have seen swift and clear capitulation as advisers abandon the long side. Since reaching a high of 65.5% on April 23rd, 2010 the Hulbert Stock Newsletter Sentiment index has fallen to 19.9%. This means that the average newsletter that tries to time the general equity market has lowered their exposure to the market by 46% points in less than a month.
When it comes to the Nasdaq market, which had been leading the charge higher, the drop is even more precipitous. At the end of April newsletter editors that time the Nasdaq recommended an exposure of 80% - an extreme only equaled at the 2000 tech bubble top. Now they have whittled it down the recommended exposure to just 3%.
Merrill Lynch Survey of Fund Managers
According to the Bank of America ML Survey, institutional money managers are retreating into US equities based on their outlook for better fundamentals and abandoning the European markets. A net 41% of managers believe that the profit outlook is unfavorable in the EU and a net 33% believe that the outlook for profits is most favorable in the US. The gap between the two economic areas (74%) hasn’t been this wide since July 2003.
A net 66% of respondents expects the US dollar to rise and lead the way for reserve currencies. In contrast, a net 46% of respondents expects the euro to continue to fall (this is twice the survey results of the same question in April).
When it comes to monetary policy, 90% of respondents do not expect EU interest rates to rise this year (that’s significantly higher than just 62% of respondents in April). As well, 25% expect no rate rise from the Fed before April 2011 (compared to 10% in April).
Emerging markets saw a significant decline with just 19% overweight it compared to 31% in April. Managers are also turning more cautious on China than any month since February 2009, with net 29% expecting that economy to weaken this year (compared to a net 5% believing it will strengthen in April).
CNBC’s Dow 5000 Poll
At the start of the week CNBC’s Squawk on the Street guest was David Hefty who argued that the Dow would go to 5000 this year - that’s more than a 50% haircut by the way! An online poll on CNBC’s website then tracked how many viewers agreed with his apocalyptic prophesy. While this poll was not scientific, immediately after the show, a shocking 40% thought he was right (Hat tip to Eddy). At the end of the week it was slightly less at 35%. Still, as an anecdote, it is telling that such a large proportion of CNBC respondents are considering and expecting such a stark possibility.
This week brought about a very interesting change in posture from retail mutual fund investors in the US. We’ve been observing their love affair with fixed income for some time, as they pour billions of dollars into bonds and ignore equities for the most part.
While it is only a weekly data point and may be neutralized by the end of the month, this week US retail investors withdrew $12 billion dollars from equity funds. Of that total $8.6 billion came out of US equity funds and $3.7 billion from foreign funds which had up to now received a positive trickle since the March 2009 bottom:
Even more intriguing, the trend of funneling massive amounts of money to fixed income came to an abrupt halt as US investors actually withdrew almost $1 billion from bond funds for the week. That brought the total for May to just $7.5 billion, far lower than what we would expect if the average inflows since March had continued unabated:
Again, keep in mind that the latest bar represents only the first 2 weeks of the month and may be revised as well as changed as more data is added to it for the remaining weeks. But unless we see a sharp pickup in fund flows for bond funds, we’re about to see the lowest monthly inflow since December 2008.
So if US investors were withdrawing money from equity funds and bond funds… where was money flowing into?
Looking at ICI data for money market funds we know that it wasn’t socked away there. According to Jason Goepfert of SentimenTrader, going by the inverse ETF volume data, investors are rushing into these bearish vehicles to bet on further declines in stock prices. This, of course, is a contrarian indicator but only at extremes. Right now we’re seeing the sort of contrarian signal from this indicator that has corresponded successfully with correction lows during the cyclical bull market. But it is not (yet) at the sort of extreme that it reaches during or at the bottom of bear market cycles like October 2008.
After spiking to an all time daily high in April, the ISE sentiment continues to melt lower. On Wednesday the equity only ratio of calls to puts fell to 120. That is lowest daily ratio since June 18th 2009. Then on Thursday’s sharp fall the ratio fell to just parity (100). And finally today, even though we had a daily strong positive day the ratio was very subdued at 124.
The aggregate effect was that the 10 day moving average was dragged down to just 146 - cut almost in half in 27 trading days.
A similar picture emerges when we turn our attention to the CBOE (equity only) put call ratio. On Thursday it surges to almost parity (0.96). And on Friday, although the market closed higher, the put call ratio was showing a fair amount of concern at 0.88. The 10 day average ended at 0.71:
As you can see this approximate level corresponds to the end of corrections we’ve seen so far during this cyclical bull market. It does not however approach the level of put buying that we have seen during bear market lows. As well, it is difficult to ignore just how excited the option traders were in April as they scooped up calls with both hands while ignoring any protection whatsoever.
Right now the major question is, is this just another correction? or have we passed the cusp? Based on the technical indicators that have helped me so far, I don’t think this is just another correction.
This week we went over several measures of gold sentiment as the metal surged into record territory. For two consecutive trading days the Daily Sentiment Index reached a 98% extreme which was also a new record for the indicator.
Silver also came in very close with a 95% DSI. And according to TrimTabs, inflows for the gold ETF were almost $1 billion this week and more than $2 billion the first week of the month. Since then, gold has weakened to $1177 but it still holds above its 50 day moving average.
Euro Magazine Cover Sentiment
The flip side of the gold trade, the Euro has been hammered mercilessly. So much so that the Daily Sentiment Index is at just 2%. And along comes the always favorite magazine cover indicator with Bloomberg BusinessWeek publishing “Uh-Oh”.
As well, the news of the weakness in the Euro have pervaded so much of our psyche that comedians now feel comfortable using them in a joke, expecting their audience to “get” the punchline. Here is an example from Jimmy Fallon:
“The euro is officially at its lowest point in four years. I guess this explains why today I saw it wearing sweat pants, eating Cheetos and auditioning for the next season of Celebrity Rehab.”
Needless to say, from a contrarian point of view, we have evidence that a confluence of various indicators and anecdotal evidence will deliver a major inflection point for the Euro (and invariably gold).
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