Sentiment Overview: Surprising Increase in Optimism

Here is the wrap up of this week’s sentiment data:

Sentiment Surveys
The weekly American Association of Individual Investors (AAII) stock sentiment survey shows a surprising increase in optimism. Of the respondents, 44% were bullish (a 5% increase from last week) and 35% were bearish (a 10% point drop from before). We aren’t near any sort of extreme level, however the direction of sentiment is puzzling since the stock market closed lower than it has for the past 18 days.

Investors Intelligence
The stock newsletter editors, as measured by ChartCraft’s Investors Intelligence, shows a similar increase in optimism. This week the II had 50.6% bulls (4% point increase from last week) and 23.6% bears (a 0.8% decrease). I’m not sure how helpful this is as the Investors Intelligence bull/bear ratio has been relentlessly hovering around 2:1 for the past few months.

In contrast to both of the above sentiment surveys, the Hulbert Stock Newsletter Sentiment index which measures a sub-set of market timing newsletters is showing a decline in bullishness. The HSNSI was at 45.2% when we hit an intra-day high of 1080 on the S&P 500 index. But now it stands at less than 29.1% a significant sentiment erosion in response to a small retreat in the index.

A recent survey of institutional investors by TheMarkets shows that an increasing number of them believe we have seen a definitive low. While in June 40% thought so, now 70% do. Furthermore, 90% of them expect the S&P 500 to climb to the 1200 level by the end of the year in 2011. Back in March only 50% were as optimistic about the S&P 500 reaching that goal.

Fund Flows
An estimated $29 billion was withdrawn from equity mutual funds (domestic) by US retail investors for the month of September. Meanwhile, they dove head first into fixed income funds by buying almost $46 billion worth of taxable and municipal bonds last month. This is a continuation of the trend which I highlighted before: Equity Mutual Funds Show Outflow Even After 60% Stock Market Rallly.

So if it isn’t Mom’n'Pop investors and it isn’t corporate insiders, who is buying? Leaving aside conspiracy theories of the Plunge Protection Team - because let’s face it, if they exist they are very bad at their job - we are left with opportunistic hedge funds. The usual suspects are either grey/black boxes or discretionary traders chasing a momentum market higher. Remove this remaining leg and the table get mighty wobbly.

Option Traders
The short term moving average for the ISEE sentiment index (equity only) fell slightly from last week’s high of 196. As you can see from the chart, these were gidy levels which we hadn’t seen since late 2007, just before the bear market began:

Zooming in on the week’s data, the ISE sentiment index hit a high of 204 on Tuesday but as the S&P 500 fell for the rest of the week, it actually registered a slightly more optimistic tone. I was watching to see if we would make it down to 100. But this small decline was not enough to rattle anyone in the ISE.

The CBOE put call ratio (equity only) reacted slighly more in response to the weakness in equities:

In contrast to the stubborn complacency shown in the ISE option data, the CBOE (equity only) put call ratio jumped to 0.84 on Friday - getting really close to the noteworthy 1 level. As well, the ratio increased every single day of the week, even on Monday when the S&P 500 closed higher.

Grey Beards
Checking in this week with a market guru who both literally and figuratively has earned the title of a ‘Grey Beard’. Steve Leuthold, the 71 year old money manager who is not afraid of going short, is very bullish right now.

Leuthold expects the S&P 500 to end the year at 1200 and even higher at 1350 next year. In keeping with that bullish view, he has 72 percent of his fund invested in equities.

“There’s pretty good momentum, and the market psychology is right. The markets turned up before the economy did. Now, the economy is improving. It might be a little better than most think. It ain’t wonderful, but it’s a lot better than it was.”

Meanwhile, Doug Kass and David Rosenberg as well as Bob Janjuah of RBS - all of whom I’ve mentioned before - remain decidedly bearish and unmoved.

Comments

[The Geoffster:]

What's a punter to think?

Oct 04 12:04 PM

[Mark Bern:]

The article provides a nice summary of sentiment indicators. But where's the beef? I do like the fact that the author seems very unbiased. It allows readers to come to their own conclusions. Unfortunately, there is no clear cut conclusion that can be drawn from the data presented. At least that is better than having only the data from one side of the argument used to support a conclusion that coincides with an author's views.

Fair and balanced. Something we don't see enough of these days.

Oct 04 12:50 PM

[yseclov:]

I side with Robert Prechter in that this optimism mean this top of this bear market rally.

Disclosure I own OEX puts

Oct 04 09:54 PM

[Freedoms Truth:]

There is One and only One Major leading economic indicator that owerwhelms all others right now... Will the Obama/Democrat zeal to socialize healthcare careen our nation on a path to inevitabl fiscal ruin. The markets have perked up on ever Obama setback, and fell back when ObamaCare advanced.

Now comes crunch time. If this is passed, USA's economic pre-eminence will be history. Save America's economy, Stop ObamaCare.

Oct 04 10:07 PM

[ebworthen:]

Anything is possible.

Contrarian indicators cubed?

Oct 04 10:21 PM

[Michael Clark:]

Ultrashorts are finally turning up. Stocks seem to be topping:


seekingalpha.com/insta...

Oct 05 02:45 AM

[James Shaw:]

My view on near term market direction:

Market has made seven consecutive monthly gains since March this year. Soon or later, market will have a real correction, no doubt about it.

Also once the correction comes, it will be quick and severe.

Now the sentiment indicators seems giving us conflict signals.

That means, we will not see big market correction in sight but we will not see big runs either near term.

That is, after last week's big drop, I believe that we will see ups this week.

Most likely, real correction will happen early next year.

Oct 05 06:28 AM

[User 357705:]

Even the most ideological acolytes of FU Capitalism are beginning to see it for what it really is. Lies and damn lies! To little too late.

Oct 05 07:17 AM

[AndrewBaker:]

Small investors are getting back in now, and the high levels of optimism at a peak in this six almost seven month rally, both suggest that the turn around is around the corner.

There are three choices: one either chases this market up where there is no fundamental reason for current prices let alone higher ones, or sit it out in cash waiting to see, or take short positions. Options two and three are debatable, and one may choose to both hold cash and take a short stance also: but option one of chasing this market higher is surely only for the deluded bulls that invest on sound-bites and believe in leprechauns.

Oct 05 09:01 AM

[Zachary Sch...:]

Optimism re-entering the market should provide some fuel for bears (myself included) as eventually the frustration will likely cause these weak hands to fold.

However, we need to watch retail figures carefully. If a positive market and investor optimism leads to consumer spending for a quarter or two, it could stall the eventual downturn in the market. I don't think the consumer has much dry powder even if he IS optimistic as lines of credit are being pulled and unemployment continues to rise. But we should be aware of this potential and initiate short positions carefully with risk control.

zachstocks.com

Oct 05 09:30 AM

[Mike from NYC:]

According to some articles I read over the past year it was said that Over-Optimism got us into our recession and many of the problems we are facing today. Optimism is what causes people to go into debt - would a pessimist (unless the person is a crook) take out a loan or go into debt knowing he may not be able to pay off the loan or mortgage? Would they buy a house knowing its value may or may not increase in value? Take on debt that he may or may not be able to pay off?

The markets can only succeed with optimism, over-optimism - isn't that what created the dot com bubble and the real estate bubble? Unbridled optimism churned by Wall Street pronunciations caused people to buy basically worthless stocks, like many of the dot com crap that was punted by private equity funds to the public so that they could make a huge profit from.

Caveat Emptor!!!!!!!!!!

Oct 05 10:02 AM

[carey_jim:]

This is starting to look like a swami rally.

I can see the rug rising off the ground. I can see the swami sitting on the rug wearing only a loin cloth.

I can't see any wires, but I'm looking for them.

Oct 05 11:11 AM

[aarc:]

Way back August and September 2008; there was so much fear of potential melt-down that led to the RTC type of rescue effort which is the $700B TARP package.

The half-hearted ping pong Jekyll & Hyde show by the US congress regarding the $700B TARP package led investors all over the world to realize that the United States had abrogated it's role as the trustworthy leader of the world and that realization led to a global stock markets meltdown.

Now, a year later and a "torrid" rally off the March low for 7 months; the same months of August and September is transforming the fear of a meltdown into a fear of potential melt UP. The Fed had taken a full-gear rescue effort and the congress and the President had shown their resolve to rise from their mistakes of Aug-Sept 2008 and had instituted several market reversal actions including regulatory forebearand such as the temporary revision of the Mark to Market rules that was causing so much bankcrupcies in many financial bookkeeping in late 2008 and early 2009.

To have a better perspective of this rally from March to September 2009, we have to look at what actually happened from September 2008 to March 2009 with market data.

It took only less than 22 weeks for SnP500 to drop from 1080 to 667 from Sept 2008 to March 2009.

While it took the SnP500 to recover from March 9 2009 low 667 to the last high of 1080 in Sept 11, 2009 a total of 28 weeks.

So far, the reversal can still be considered "bearish" and/or "reluctant" in that the selloff from 1080 to 667 was consumated in only 22 weeks while the attempted recovery from 667 to the last high of 1080 went a long way toward 28 weeks of climbing the wall of worries.

At this stage, I believe that only a major catastropic event or a series of catastropic events with global implications can possibly cause a capitulation selloff similar to what happened in Sept 11, 2002 that led to the final bottom on mid-October 2002 for the years 2000 to 2002 meltdown.

The bears will need something much much worse than the collapse of the World Trade Center in Sept 11, 2002 to serve as a catalyst for the capitulation selloff since most seasoned traders and investors had already been hardened by their experience with the 2000 to 2002 meltdown; the 9/11 capitulation selloff; the Avian Flu in Asia; the Katrina flooding; the tsunami devastation of Thailand; the catastropic earthquakes in China and Japan; and lastly for 2007 to 2009, the global stock markets meltdown caused by the relentless meltdown of US housing sector that has started 2006 thus transforming the housing meltdown into the start of the banking credit crunch by Jan 2008.

It had been 9 years of bad news since the collapse of the dot.com bubble in the United States.

It will take a lot more devastating news than those of the previous 9 years in order for the "battle hardened" investors to go into a capitulation selloff.


Optimism or an abundance thereof is needed right now to decisively reverse the downside trend and finally remove any doubt in everybody's mind that this rally is a bull run and not a bear rally.

The fast approaching earnings season might just be the catalyst needed in order for the fear of potential melt-up to turn into a panic buying.

If anything else, a luckluster earnings season will only mean we are still stuck in the mud and we might as well spend the rest of 2009 going nowhere.

Oct 05 01:01 PM

[stockratease:]

Your article sums up what a lot of people are feeling - confusion,

why are equity markets climbing with jobs
Deteriorating
,
Banks not lending and consumers contracting. Not to mention the problems that still exist in the financial system ( more bank failures, commercial real estate etc etc) ?
why are some supposedly smart people like Mr Leuthold bullish while a bunch of other supposedly smart people like Bob Janjuah, Meredith Whitney, Mohamed El Erian, and Nouriel Roubini, notably bearish on equities?
Why is the MSCI world index up almost 70% just a few months after the biggest destruction of wealth since the second world war?
The answer is liquidity. When central banks open the taps its amazing what dreams may come, and If the taps stay open prepare to continue to be amazed.
but what about the fundamentals i hear you say? Who in their right mind would buy the market on its current valuation? Well markets whether they be equity, bond, commodity or currency will from time to time detach themselves from fundamentals. The oil price last year was a good example. Nasdaq 2000 was another, there are numerous illustrations.
there are no longer reasons for value investors to join the party but there will be plenty of momentum players who will.
So stocks could get bid up from here no doubt but with the market now detaching itself from reality the inevitable comedown will likely take many by surprise and will no doubt compensate the bears for having had to wait so long....

Oct 05 02:19 PM

[rennert:]

Just came back from K-Mart the prices are looking very inflationary just like my grocery store isles. Good Will Stores will be the new Walmart and K-Mart.

Oct 05 10:16 PM