Here is this weeks look at the sentiment developments across financial markets:
After hitting a euphoric tone last week, the retail responders to the AAII survey toned things down a bit. But not much. We are still seeing quite a bit of bullishness with 45% expecting higher prices and only 25% lower prices. This brings down the bull ratio a tad from 68% to 64% leaving sentiment still relatively elevated.
The stock market newsletter editors quantified by Investors Intelligence show a continuing increase in confidence. This week the bulls outnumbered the bears for the third consecutive week. The bulls were 41.4% while the bears were 29.3%. This brings the bull/bear ratio to 0.59 which is the highest since August 10th 2010, just as the S&P 500 bumped its head against the top of the summer range and fell lower.
Newsletter Editors Sentiment
According to the Hulbert Stock Newsletter Sentiment Index (HSNSI) newsletter editors that try to time the equity market are lukewarm. The HSNSI stood this week at 21.4% implying that the average editor is suggesting that their clients have 21.4% of their portfolio long this market and the other 79% in cash. That is down from 35% long the market at the start of August 2010 but much higher than the 16% short in mid July 2010.
Daily Sentiment Index
The retail traders measured through the DSI continue to show an almost extreme level of optimism. At the start of the week, they were 87% bullish on the S&P 500 index and 85% bullish for the Nasdaq.
NAAIM Survey of Manager Sentiment
It seems that the active money manager polled in this survey are reluctantly becoming more bullish. This week they finally increased their average exposure to 55% long the market. Their median exposure also increased slightly to 55% after 5 weeks of being at 50%. But as I pointed out last week, there is very little consensus because we are seeing a wide disparity in responses as we’ve rarely seen in the survey’s history. Perhaps, as the year draws to a close, managers are loath to take on risk that would put their jobs at risk.
In contrast to US consumer confidence that is wallowing in depths it has not seen in decades and small business confidence, large company CEOs are feeling just fine. While the level of confidence is still not at the height that it was in 2004, it is showing a healthy sentiment. Another survey conducted by the Business Roundtable shows that CFOs are expecting sales, earnings and capital expenditures to reach levels last seen during the previous economic expansion cycle.
Source: Fidelity Investments
Mutual Fund Flows
With a week to go, the monthly mutual fund flows are shaping up mostly in line with the long standing trends which we’ve discussed previously. Retail investors in the US continue to exit domestic equities and rush headlong into fixed income. So far, they have withdrawn $13 billion from US equity funds. That is more than the amounts they withdrew in August, July or June. At this rate of weekly flows, they are making a run for the worst month for the year. That title is currently being held by May with negative flows of $23.6 billion.
Bond funds have received $20 billion of inflows which is in line with the weekly trend this year. With another week to go, this month will most probably shape up in line with the past 3 months - somewhere between $24-28 billion. Investors have become especially interested in emerging bond funds, sending about 29% of total bond fund inflows to that sub-sector, according to Lipper FMI.
US investors have become ambivalent about foreign equities with what was a significantly positive inflow at the start of the year (January had $10 billion) being reduced to just a trickle last month and perhaps the first outflow in 17 months. With three months remaining in 2010, they have been able to attract more assets this year than all of 2009.
According to TrimTabs, precious metal and real estate funds have been the most popular specialty sectors. It is not a surprise to see precious metals finally receiving significant inflows but the inflow of assets to real estate funds (especially commercial REITs) is surprising. TrimTabs reports that they have received 9.1% of asset flows to date and have returned a respectable 17.8% so far for the year. Not bad for a sector that was supposed to have imploded months ago.
TrimTabs also mentions that leveraged short ETFs are continuing to receive inflows - from a contrarian perspective, this is bullish. Aggregate long equity ETFs received $14.6 billion (so far in September) while they had outflows of $11 billion in August 2010.
We are continuing to see a deterioration in the bullish scenario suggested by the strong buying from insiders (relative to sales) at the start of the month. The current level of buy/sell ratio, according to date from Thomson Financial (see chart below), is as high as it was in early to mid April 2010:
There was little change to report from the options markets. The CBOE (equity only) put call ratio fell to 0.48 on Monday but on Friday as the S&P 500 index overtook that previous high, it only fell to 0.57. The 10 day simple moving average was unchanged from last week at 0.59.
The ISE Sentiment index is also where we left it last week at 188. Or to put it in put/call terms: 0.53. So more or less we are seeing the same level of bullishness as last week, which isn’t really saying much.
Initial Public Offerings
The quantity and size of IPO filings, pricings and placements is a litmus test for the wider stock market sentiment. It shows just how much ‘animal spirits’ are loose on Wall Street and how much risk the average investor is willing to take. And as we’ve looked at before, historically it can be a good long term market timing tool. So far, this year has provided a trickle of IPOs which have provided mediocre to disappointing returns.
Relative to how much companies have filed to sell, the amount raised this year was the worst in a decade. That is, while $48.9 billion worth of stocks have been filed, only $19.1 billion has actually been sold. More than half of the IPOs filed have not been completed. There is ample supply in the pipeline as venture capitalists and private equity funds want to unload investments. But there is hardly enough demand to soak up that supply. Investor demand for stocks in general is anemic and the fact that 61% of the IPOs this year have lost money aren’t helping their cause.
After 3 weeks of crickets chirping, the China based SouFun went public on September 17th and has treaded water (at best). Prior to this the most sought after IPO was Tesla Motors (TSLA) which I suggested provided a tell for the market in general. So far that has been accurate as they have both traded in a meandering range.
Coming up next month is the IPO of GM that hopes to raise $16 billion - the second largest US IPO since Visa (V) (which raised $19.7 billion in 2008). Much like a large box office opening, ahead of that large offer, no one really wants to compete with GM for capital so expect to see a very quiet IPO market.