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Sentiment Overview: Week Of October 1st, 2010 at Trader’s Narrative

Here is this week’s sentiment overview:

Sentiment Surveys
The weekly AAII sentiment, measuring US retail investors shows a slight amelioration in their optimism. After reaching a critical level two weeks ago, the bull ratio has fallen from 68% to 57% with 42.5% responding as bullish and 31.6% as bearish:

aaii bull ratio Sep 2010 end

Since the S&P 500 index has trended sideways for the past week, it is promising that optimism is actually waning. Had we seen an increase in bullishness or even a holding pattern at the extreme level of two weeks ago, the market would be in a perilous state.

Investors Intelligence
For the second week in a row, in contrast to the retail investors, stock market newsletter (measured by ChartCraft’s Investors Intelligence) survey are showing an increasing appetite for risk. This week, according to Investors Intelligence there were 43.3% bulls and 27.8% bears. This pushes the bull ratio to 60% - the highest since the end of May 2010. For a chart, please see last week’s sentiment overview.

Hulbert Newsletter Sentiment
This isn’t the first time that one measure of newsletter editors’ sentiment has clashed with another one. The Hulbert Stock Newsletter Sentiment index (HSNSI) stands at 22.10%, meaning that of the newsletters that attempt to time the market, the average recommended market exposure is 22.10% long the equity market. To put that in perspective, this is rather low. In early August, the HSNSI was 35% even as the S&P 500 was at 1125. And the last time the Dow Jones stood at this level was in early May (before the ‘Flash Crash’) when the HSNSI was 51.80%. So it would seem that there are very few believers in the stock market’s recent bullish behavior.

NAAIM Survey of Manager Sentiment
This week’s survey of active money managers shows that they are continuing to ramp up their long exposure as the market stair-steps higher. The average exposure is now 68% long (the median 66%). This is the highest since the end of April/beginning of May 2010, just as the market was sliding into its most recent slump. Also noteworthy is the fact that there is more consensus now among the managers, with this higher bullish sentiment, than there was in the past three weeks when they were less bullish. So as a group, they are more bullish and there is less ‘disagreement’ to be bullish.
NAAIM survey of manager sentiment Sep 2010 end

Mutual Fund Flows
This week’s mutual fund flow report continues to reflect the exodus of retail investors from the US equity market. Another $2 billion was withdrawn bringing the total for the past four weeks to $16 billion - the largest outflow since May 2010. Bond funds continue to receive the bulk of inflows ($6 billion) with a total of $27 billion.
equity bond fund flows Sept 2010

The latest survey of US retail mutual fund owners is showing the same reluctance towards risk that we have seen for some time in the weekly fund flow data. What is surprising to see is that mutual fund investors 65 and older are behaving more rationally towards investing risk than investors younger than 35. Of these older investors who are either retired or about to, 53% were willing to take “Average risk for average gain” while only 50% of those younger than 35 said the same thing.
mutual fund willingness to take risk Sep 2010

The older investors are also showing more resilience, having bounced back from the bear market with a higher willingness to take risk (although the nominal amount is still lower than the younger investors). In contrast, younger investors have continued to rein in risk taking consistently from 2008 to 2010.

Option Sentiment
We’re not seeing much movement in the options market. Both the ISE Sentiment index and the CBOE put call ratio are meandering basically where they were for the past two weeks. The option sentiment seems a tad too bullish but not significantly. The 10 day moving average of the (equity only) CBOE put call ratio is 0.59 (with an equivalent call put ratio being 170). The ISE 10 day moving average for the equity only call put ratio is 187 (equivalent put call ratio of 0.53). The OEX put call ratio is equally lukewarm.
ISE sentiment 10 day moving average Sep 2010 end
This is a bit frustrating but there’s nothing we can do if an indicator isn’t providing an edge.

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5 Responses to “Sentiment Overview: Week Of October 1st, 2010”  

  1. 1 Tim

    Do you have access to mutual fund cash holdings? I’ve heard their cash levels are possibly at record lows. I can’t find any site that reliably provides updates on that.

    Sentiment is high enough to be worrisome after the flash crash event, when nothing has been done to prevent it from happening again. People are pretty complacent if you ask me, and they are playing with fire. What if someone wants to sell a big block of futures contracts again? Do people honestly think no one will ever want to get out of the market again in size?

    Plenty of catalysts for the coming crash are out there. Expect some volatility in financials over potential lawsuits and fines because of this foreclosure crime/fraud it seems many big banks have committed. The whole sector could get punished. Not to mention the banking worries in Europe. What worries me most is how much bad data and looming threats to financial stability are being ignored by market participants. It’s a recipe for disaster.

    While none of these sentiment readings on their own provide a clear edge, in the environment we find ourselves, frankly people should be more worried than they are, and that’s the edge.

  2. 2 Gary Junkins

    Excellent post by Tim - I also have been wondering about mutual fund / cash ratio ! I know that is a very important indicator of “fuel” for a bull mkt. or not. Things really are different this time ( largest gain in Sept. for decades ? What does that say about Oct and all the “famous” crashes ?????????

  3. 3 Aly S.

    Tim, mutual fund cash levels are at or near all-time lows. However, a big reason for that may be the fact that the interest rates are so low that holding cash makes little sense. So, be careful how you interpret the cash levels.

  4. 4 Er.SS Hari

    Put call ratios have been made defunct for any prediction due to algorithm and spread arbitrage trading strategies.Sentiment indicators are no more than secondary confirming indicators.Price is the only leading indicator so long intact go with it and even hedging is uncalled for.Why to get exploited having crashophobia.

  5. 5 oa

    what is so complicated? why not just look at 2004 chart…

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