Here is this week’s look at what is happening in sentimentland:
Starting off with a recap of the various sentiment surveys, last week, you may recall that I commented on the “Meh” state of the ever popular weekly AAII survey of US investor sentiment:
It will have my undivided attention when it either falls lower to 30% or less, or it rises above 60%. Until then.
This week, the survey obliged with the bears rising again to 49.5% and the bulls falling to 20.7%. That pushed the bull ratio down to 29.5% - just a smidgen under the threshold I mentioned last week. Of those who are not undecided or neutral, less than a third are optimistic about the stock market’s future health.
As you can see from the chart above, this level of pessimism isn’t really extreme. We saw more despondence in early July. But it is close to the level of pessimism that we last saw in early November 2009. That turned out to be a very good signal as the equity market went on to rally into January 2010.
Actually, since the survey was started in 1987, we’ve only had 48 other weeks where the AAII bullishness was this low (less than 4% of the time). According to a quick study by Jason Goepfert (of SentimenTrader.com), looking ahead by 3 months, the S&P 500 index has rallied by an average of 6% with an almost perfect positive performance.
ChartCraft’s weekly survey of newsletter editor sentiment shows a continuing drift towards more pessimism but it has already been under the level it was in November 2009 for quite some time. This week the Investors Intelligence bears were 31.5% while the bulls were 33.5%. On a relative level, we are back to the same place we last saw at the end of last month. And we’ve certainly seem much more pessimism than from this particular metric, not too long ago: Sentiment Overview for Week of July 16th 2010.
Checking in with the extremely jittery TSP Sentiment we find it once more dipping into extreme territory with 60% bearish and only 29% bullish. Here’s a chart of the bull/bear ratio:
According to the predefined rules, the TSP has given a buy signal within a bear market. But since it is as skittish as a long-tailed cat in a room full of rocking chairs, we may find it zooming back into optimism by next week.
The professional money managers surveyed measured by the NAAIM Sentiment index is showing quite a bit of complacency. Even as the S&P 500 index is approaching levels we last saw in early July 2010, managers have positioned their portfolios with much more exposure to the market than at that time.
The average exposure is 44% long while the median is still, as before, 50% long (not shown in chart below):
In contrast, for the week of June 30th, when the S&P 500 index closed at 1027, their exposure was 36% (average) and 40% (median). One would imagine that seeing the market melt lower once again, they would feel a bit more concerned and reduce exposure. But that doesn’t seem to be the case. At least, not yet.
The Rydex traders who attempt to time the market by using the assorted Rydex family of mutual funds are pulling in their horns once again:
Similar to other sentiment gauges, we are seeing a certain amount of capitulation but not exactly an extreme level or one that overtakes recent spikes that defined real fear. On a more bullish note (from a contrarian point of view) we are seeing a total collapse in the leveraged equity funds. These are the preferred choice for the more aggressive investors and traders. Seeing them fall once again to multi-year lows (as they did in early July) is usually a harbinger of an imminent rally.
High Yield Bond Funds
Unless you’ve been dedicated to ignoring this story, you already know of the trend in US retail investors shunning equities for bonds. What is even more interesting is that these same investors are now reaching for junk bond funds as their appetite for equity like returns is stoked by a zero interest rate monetary policy. Last week (August 14th) there was a new record weekly issuance of high yield funds: $15.4 billion.
According to Dealogic, some of that is pent up demand from earlier in the summer when the European crisis shut down the high yield market. But much of that is real demand from retail investors who are searching for higher returns they can’t find from the usual sources. With high quality corporate bonds and treasuries providing paltry returns, high yield ETFs are also seeing a massive inflow. The two largest funds (iShares iBoxx $ High Yield Corporate Bond Fund and Barclays Capital High Yield Bond) both saw more than $1.2 billion inflows from January to July 2010.
At the start of the week the CBOE (equity only) put call ratio fell to just 0.39. Other than that one day’s extraordinary behavior, the rest of the week was rather boring with the 10 day moving average ending at 0.65.
The ISE Sentiment index based on a call put ratio didn’t show the same sudden jump in put buying on Monday. Similar to the CBOE’s data, the ISE short term moving average is at a relatively elevated level. At 186, the ISE’s equity only 10 day moving average is equivalent to a 0.54 put call ratio.:
As we saw last week, professional managers measured by the Bloomberg monthly survey have warmed up again to the Chinese markets. Retail investors from China are joining the foreign asset inflow. According to TrimTabs’ asset flow analysis, Chinese investment accounts increased for the 5th straight week. The majority of the money was destined to the secondary market, even though China has had some major IPOs. This suggests that the retail sentiment on the ground there continues to improve.