Sentiment Overview: A Scarcity of Bulls

This week the sentiment data brings a very intriguing turn of events so let’s get started:

Sentiment Surveys
The star this week is the ever so humble and common AAII weekly survey of US retail investors. This sentiment indicator sends extreme signals every once in a blue moon. So I guess you better check the night sky tonight because we haven’t seen so few bulls in this survey in a long time.

This week’s AAII results show only 22% bulls and a whopping 56% bears. The last time we saw this few optimists and this many pessimists was the week of February 19th 2009. Just before the spring rally. To put that in (even more) perspective, out of all the data that we have so far, only 4% of the time have there been less bulls.

Here is a chart of the bull ratio (bulls divided by the total number of bulls & bears):

I’ve zoomed in to the past 7 years or so since showing the whole time series from 1987 would be overkill. From 2002 till now, there have been 8 instances where the AAII bull ratio was less than 30%. But as the last extreme reading in February suggests, it is best to not act in haste when presented with such a scrumptious contrarian gift. Historical data suggests that sitting on your hands for the next few weeks is the most prudent strategy (for longs).

I hope that I haven’t understated the gravity of this week’s AAII sentiment survey result because there is a high probability that it will once again prove to be prescient in pinpointing an upcoming inflection point. It is most definitely a tell that after a 55% rally we find the AAII bull ratio at such an extreme low when in early 2004 after a 37% rally from the 2003 lows the bull ratio was at the other extreme (see above chart).

The one puzzling thing is that the AAII asset allocation survey shows a slight uptick in equities (to 57%) while back in February when the bull ratio was so low last, it was closer to 40%. I guess the message the AAII folks are sending is that they like equities longer term but short term they’re very nervous. And that’s remarkable because of how little off we are from the year’s highs.

Investors Intelligence
While this week the AAII deservedly monopolized our attention, the measure of newsletter sentiment from ChartCraft is a snoozefest. The II this week is almost completely unchanged with 48.3% bears and 24.7% bears for a (yet again) bear to bull ratio of 2:1. I’m not sure how to reconcile these two disparate metrics but I do know that this is really nothing new as they often conflict with one another.

Hulbert Newsletter Sentiment
Thankfully, we have another measure of newsletter sentiment. Currently, the Hulbert Stock Newsletter Sentiment Index (HSNSI) stands at 3.2% - which implies that the average recommended exposure by short term timing newsletters is to be long 3.2% of their client’s portfolio.

Putting that in perspective, it is a decline of almost 23% points from two weeks ago when the S&P 500 index was about 1090. And it takes the HSNSI back to where it was on March 24th 2009. But if we go back a bit more to early March it was -20% (recommended exposure of being short the market). Then a bit further back to July 2008 with a truly extreme -43% HSNSI reading. So all in all, it isn’t as extreme as the AAII but it does suggest that the newsletter editors have, to a large extent, given up on the rally.

Barron’s Big Money Poll
Last weekend’s Barron’s had the semi-annual “Big Money Poll” which includes some very smart institutional money managers. But if you look at their group track record it is appropriate to call them the Big Money, rather than the Smart Money.

Currently they are rather bullish - so the title of Treading Carefully is a misnomer. About 60% of them are bullish, while just 13% are bearish which makes the bull ratio 82% - giving any contrarian long this market, an uneasy feeling. But before we can use them as a contrarian indicator, they have to present some form of correlation to the stock market.

They don’t. And that’s probably the most damning thing you can say about a sentiment indicator because it means that it is basically useless. So while you may respect the individuals who participate in the poll, it is a waste of time to analyse their aggregate position or to try in any way to glean something useful form it. With a heavy sigh, we have to relegate the Barron’s Big Money Poll to the round filing cabinet, along with the TickerSense Blogger Sentiment poll and the Citigroup Panic/Euphoria model.

Rydex Traders
The short term market timers who use the Rydex family of mutual funds have turned tail and swiftly gone bearish. The NAV adjusted ratio for the Rydex Nova/Ursa funds is now as low as it was in early July - just before the S&P 500 rallied off the 200 day moving average. Suddenly these twitchy traders have given up their usual strategy of buying any short term weakness. From a contrarian point of view, that’s a good sign for the start of a significant rally.

State Street Investor Confidence
This monthly sentiment measure from State Street (STT) monitors institutional investors and their attitude to risk. In October it fell to 108.4 from its August high of 122.8 and is back where it was in May 2009 (even though the S&P 500index is much higher than it was back then).

For a longer term chart and more details check the following link: State Street Investor Confidence.

Options Sentiment
There wasn’t much movement in the ISE sentiment indicator this week. For further information and a long term chart, check out last week’s sentiment overview.

The CBOE put call ratio similarly nudged up slightly as fear re-entered the options pits. The short term moving average of the equity only put call ratio continued to rise slowly (from 0.637 to 0.67) but we still closer to multi-year lows.

Comments

[JudeJin:]

put/call ratio and investor sentiment are contradicting. how to interpret this?

Nov 08 06:13 AM

[LR European:]

Excellent piece, drawing a lot of relevant information together without bias. Thank you.

Nov 08 08:51 AM

[Moon Kil Woong:]

Doesn't these sentiment indicators usually drop after September and then rise in January into Summer. How much is cyclical? And if it's cyclical what does it really say right now asides from people fret about Christmas season until afterwards?

Nov 08 09:09 AM

[E Nuff Sed:]

My long term technical indicators are showing extreme bullishness.
seekingalpha.com/insta...
This kind of bullishness does not happen very often and usually presages a good 12 - 36 month bull run. The bearish sentiments from your article confirm this as markets climb a wall of worry. This is because worried investors stand on the sidelines with dry powder batting their inner demons of fear and greed till the latter overwhelms the former.
It is indicative that Warren Buffet made his "all in bet" on BNI last week. To my ear this is like a some one ringing the bell for the thanksgiving dinner. Time to dig into the turkey and mashed.

Nov 08 12:11 PM

[bartpr:]

the 60% peak this year so far after this rally tells me something. the individual investor is not participating in this market as the past. this is much lower than the 90% in mar rally of 03. maybe the individual investor has so much loss yet that many are disillusioned with the market. also, with the loss of home equity of everyone who owns a home, this market will go nowhere for years.

Nov 08 01:20 PM

[enigmaman:]

Does any of the reports reflect a margin of error, because what consumers say they will do and what they actually do is often times not factual. If consumers say they intend to spend more going forward then they have been, why take what they say at face value,. People tend to tell you want you want to hear, say one thing and do another. So if 10% of survey respondents say they expect to buy a new car in the next year, will auto dealers ramp up the assembly line to get ready for the surge in sales, probably not, what if consumers tell Walmart they will increase spending at their local store by 20%, will Walmart stock shelves and build their inventory, probably not, does the Government really believe they can manipulate what happens in the future by providing a false sense of security today?

Nov 08 05:22 PM

[Twitcher:]

Why Barron's folds in mediocre money managers with the ones with great track records in their Big Money polls, I sure don't know. I've been a subsctriber to Barron's for years and think these generalizing polls are worthless, as you do. Get with it, Barron's

Nov 08 07:31 PM

[bob adamson:]

Thank you, Barbak, for drawing together these sources of information on market sentiment. Their general bearishness helps confirm for me an anomaly that the current stock market reflects. That anomaly is that after a very remarkable market gain over the past eight months the general mood is so down.

If the past eight months had occurred against the backdrop of any post WW period except 2007-9 there would now be euphoria and the likelihood that the market was seriously overbought. The reality may be that investors generally are so fixated on the traumatic experience of the fifteen or so months prior to March of 2009 that the magnitude of the partial recovery since then is largely discounted in their thinking.

Even though the S$P 500, for example has more that retraced its earlier fall by more than 50% (a warning sign in other deep recessions) the current bearishness gives me wary optimism that the current upward trend may continue a bit further. The picture requires day to day scrutiny and reassessment however.

Any reactions?

Nov 08 09:20 PM

[Northern Da...:]

Thanks for another good piece of info Babak. I don't find it overly shocking that there are so many bears these days, in view of the fact that we've just witnessed four straight days of market gains on 4 straight days of seriously declining volume (as shown on the daily chart of the S&P). This is a serious state of affairs, and it makes one wonder "who exactly is buying this market"? With volume decreasing for 5 days straight, the late day stick saves that failed miserably the week prior, finally had the "old magic" affect this week. But only when volume was very light making the market much easier to move (move being spelled m-a-n-i-p-u-l-a-t-e). In my opinion, this has ominous implications.

What I find to be 100% contradictory to the bearish sentiment on the equities markets though, is that the sentiment on the USD is reported to be 96-98% bearish as well. That being the case, and with the chart of the USD showing a real possibility of a sudden and unexpected surge in the dollar, for whatever reason, there's a real possibility that the bearish case for the equities markets might be very well founded.

There's no doubt... we're going to find out this week.

Nov 09 03:12 AM