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On the surface, the most surprising thing about the sell-side’s sentiment at the start of a brand new year is how much it feels like their sentiment from the old year that just passed. Fashions change. Hemlines adjust. Fads come and go. But the feeling of the sell-side continues to stay bearish with no bullish industries identified.
That being said, there could be more going on here than initially meets the eye. Since we’ve started tracking sell-side sentiment, it has become increasingly clear that it is not only the level of the sentiment that matters but also the velocity at which sentiment is accelerating, changing directions or, in some cases, not moving at all.
As the diagram below indicates, sell-side sentiment has only had five meaningful changes in direction over the last 18 months, each indicated by an arrow on both the indicator graph and the aligned chart of the S&P 500. Four shifts were signified by an accelerating bearish sentiment; the other shift was bullish. Most importantly, all four bearish shifts in sentiment preceded meaningful downturns in the market, while the bullish shift preceded a period of moderate appreciation and a mainly flat market.
The ability for shifts in the aggregated sentiment of the sell-side to precede market movements is an indicator of incredible importance in markets, where these days nothing much seems to make sense or be consistent.
The obvious question is “Where are we now?”
The not-so-obvious answer is, “Hard to tell.”
The sell-side continues to be relatively blasé about the last two months of the market as indicated by the fact that their sentiment has remained almost unchanged for an extended period of time even as volatility continued to move the market in a whip saw like fashion on a daily basis.
So…what happens when the sell-side is indifferent?
The only other time we’ve seen this level of indifference towards the market was between July and September of 2008 (indicated by the first oval above). During this period, the S&P 500 gyrated around but ended up almost exactly back where it began. It wasn’t until after a sentiment break by the sell-side in mid-September that the S&P 500 began its last and most dramatic decline of 2008.
Periods of static sentiment have historically indicated that not much is likely to occur until sell-side conviction re-enters the picture. While it is possible that we will likely continue to see substantial movements one way or the other, these movements will likely continue to revert and keep the S&P 500 range bound as a result of a lack of true conviction by market participants.
Entering into 2009, we will continue to keep an eye out for a significant sentiment shift in either direction. While it’s true that the First Coverage Sell-Side Sentiment Indicator does have a mildly bullish undertone right now vs. November, we would need to see a more dramatic move to feel confident that the future direction of the market was already set. Until then we believe the sell-side is of the opinion that we’ll be living with a market that’s going nowhere fast in the long-term but might continue to exhibit short-term volatility.
Finally, a message to the brave who are starting to once more re-allocate capital in this market and wonder what type of year 2009 will likely be. According to the sell-side, the most bearish consumer stock of the year by sentiment is Tiffany’s (TIF)…the most bullish is Wal-Mart (WMT).
Happy New Year!
Until next week…