Here is this week’s sentiment summary, bursting at the seams with sentimental goodness:
According to this week’s AAII sentiment survey, the US retail investor is becoming outright bold. The bullish crowd surged to 50% while the bears increased slightly (4% points) to 35%.
ChartCraft’s measure of the average investment newsletter editor’s sentiment - Investors Intelligence - also showed a similar level of optimism: the bulls increased 5% points to 47.2% while the bears fell 5.3% points to just 25.8%.
Rounding out the trifecta near or at 50% was Market Vane (US equities) at 46% bullish. That’s the most bullish it has been since May 2008 when the S&P 500 was trading at 1400.
Ned Davis Research’s proprietary sentiment indicator, called the Crowd Sentiment Poll stands at 62% - just eking into the extreme optimism range (anything above 61.5%). In the past this measure has reached highs of 68% which would give the sign for investors to sell weaker holdings.
Finally, Jake Bernstein’s proprietary sentiment indicator, Daily Sentiment Index (DSI) is also showing an extreme level of bulls. For the Standard & Poor’s 500 index the sentiment reached a high of 88% bullishness. The Nasdaq 100 sentiment was marginally lower at 87%. Needless to say, this is indicative of a short term top.
The DSI is uncommon, especially outside professional settings. Partly this is because Bernstein keeps the method and calculation a secret but also because it is an extremely expensive report. But what I’ve heard from trading friends, it is well worth it as it has just about nailed the exact inflection points at every major move.
In last week’s sentiment overview we briefly touched on the gargantuan amounts of cash sitting on the sidelines of the market. While we’re now seeing flows out of cash only a small fraction is going to equities.
In fact, it would be accurate to say that the powerful spring rally has been mostly driven by institutional traders and investors with very little juice coming from the retail ‘Mom and Pop’ investor. According to the Investment Company Institute (ICI) small investors have only poured in $4.1 billion into the equity markets (for July). That’s chump change, especially when we compare it to the flows from cash to bond funds which stands at $28.8 billion. More on the bond market below.
Turning to the options market, the CBOE (equity only) put call ratio fell to a multi-year low of 0.49 today. The last time it was lower was in late December 2007 (0.42) when the S&P 500 index was floating around 1500. Of course, the current level means that equity option traders are on average so confident of a rising stock market that they are twice as likely to purchase calls as puts.
More significant than any daily fluctuations, the short term moving average (20 day simple) of the CBOE’s equity only put call ratio has reached the lower limit of its channel:
The daily ISE sentiment index reached a high of 220 last week but this week it has been relatively subdued, especially compared to its more famous cousin on the CBOE. But its short term 10 day moving average has moved up to 180, where for the past few years it has signaled too much complacency.
Other than the weekly sentiment measure from the American Association of Individual Investors, I also monitor their weekly asset allocation. This measure is less volatile but still provides insight into what the weaker hands are doing in the market.
As of the most recent data, they have upped their allocation to bonds so much that it stands at 25% of the average portfolio. That allocation is highest since this measure was started in 1987!
The last time we reviewed this strange behavior was a few months ago when they had allocated an extreme amount to bonds. That coincided almost precisely with a top in the long bond market. I’m baffled why the average retail investor would suddenly become so enamored with fixed income right now. In any case, as contrarians we have to pay attention.
On the other side of the street, according to a recent JP Morgan survey institutions have drastically cut their optimism towards bonds. There are now only 22% bulls compared to 38% at the end of June 2009. As well the net long index is down to just 6% down from 30% on June 29th, 2009.
Agh! Greenspan!! This is like a bad dream. I thought he was gone and he’s back in the news commenting that the worst is over and that he’s “pretty sure we’ve already seen the bottom.”
From someone with an impeccable track record of being wrong when it comes to any econometric forecast that is a frightening thing to hear. Oh, you didn’t know that Greenspan has a horrible track record?
I’m referring to not just his disastrous chairmanship of the Fed but also his long career in the private sector, working at his own consulting firm: Townsend-Greenspan & Co. Greenspan had an abysmal record throughout his private career unable to hit the side of a barn with a beach ball. He missed so many recessions and forecast so many that didn’t come about that a random dice throw or even coin flip would have been more prescient.
Whether it is opining about the price of natural gas, adjustable rate mortgages, the real estate market, the stock market or predicting recessions, Greenspan got it 100% wrong. Which is partly an explanation of why we are in the mess that we find ourselves in today.
If nothing more, it is in bad taste for Greenspan to make such remarks because it is akin to an arsonist returning to the scene of his crime to comment on the rebuilding effort. Much better for him to simply disappear into infamy where he belongs.
And frankly based on his ability to be the perfect fade, it makes the hairs on my back stand up when I hear him say that he’s “pretty sure” we are on our way to recovery now.
By the way, if you haven’t already, pick up a copy of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve for a blow by blow account of just how incredibly wrong and dangerous this man is.