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Here is this week’s sentiment overview:

Sentiment Surveys
The weekly AAII sentiment, measuring US retail investors shows a slight amelioration in their optimism. After reaching a critical level two weeks ago, the bull ratio has fallen from 68% to 57% with 42.5% responding as bullish and 31.6% as bearish:

aaii bull ratio Sep 2010 end

Since the S&P 500 index has trended sideways for the past week, it is promising that optimism is actually waning. Had we seen an increase in bullishness or even a holding pattern at the extreme level of two weeks ago, the market would be in a perilous state.

Investors Intelligence
For the second week in a row, in contrast to the retail investors, stock market newsletter (measured by ChartCraft’s Investors Intelligence) survey are showing an increasing appetite for risk. This week, according to Investors Intelligence there were 43.3% bulls and 27.8% bears. This pushes the bull ratio to 60% - the highest since the end of May 2010. For a chart, please see last week’s sentiment overview.

Hulbert Newsletter Sentiment
This isn’t the first time that one measure of newsletter editors’ sentiment has clashed with another one. The Hulbert Stock Newsletter Sentiment index (HSNSI) stands at 22.10%, meaning that of the newsletters that attempt to time the market, the average recommended market exposure is 22.10% long the equity market. To put that in perspective, this is rather low. In early August, the HSNSI was 35% even as the S&P 500 was at 1125. And the last time the Dow Jones stood at this level was in early May (before the ‘Flash Crash’) when the HSNSI was 51.80%. So it would seem that there are very few believers in the stock market’s recent bullish behavior.

NAAIM Survey of Manager Sentiment
This week’s survey of active money managers shows that they are continuing to ramp up their long exposure as the market stair-steps higher. The average exposure is now 68% long (the median 66%). This is the highest since the end of April/beginning of May 2010, just as the market was sliding into its most recent slump. Also noteworthy is the fact that there is more consensus now among the managers, with this higher bullish sentiment, than there was in the past three weeks when they were less bullish. So as a group, they are more bullish and there is less ‘disagreement’ to be bullish.
NAAIM survey of manager sentiment Sep 2010 end

Mutual Fund Flows
This week’s mutual fund flow report continues to reflect the exodus of retail investors from the US equity market. Another $2 billion was withdrawn bringing the total for the past four weeks to $16 billion - the largest outflow since May 2010. Bond funds continue to receive the bulk of inflows ($6 billion) with a total of $27 billion.
equity bond fund flows Sept 2010

The latest survey of US retail mutual fund owners is showing the same reluctance towards risk that we have seen for some time in the weekly fund flow data. What is surprising to see is that mutual fund investors 65 and older are behaving more rationally towards investing risk than investors younger than 35. Of these older investors who are either retired or about to, 53% were willing to take “Average risk for average gain” while only 50% of those younger than 35 said the same thing.
mutual fund willingness to take risk Sep 2010

The older investors are also showing more resilience, having bounced back from the bear market with a higher willingness to take risk (although the nominal amount is still lower than the younger investors). In contrast, younger investors have continued to rein in risk taking consistently from 2008 to 2010.

Option Sentiment
We’re not seeing much movement in the options market. Both the ISE Sentiment index and the CBOE put call ratio are meandering basically where they were for the past two weeks. The option sentiment seems a tad too bullish but not significantly. The 10 day moving average of the (equity only) CBOE put call ratio is 0.59 (with an equivalent call put ratio being 170). The ISE 10 day moving average for the equity only call put ratio is 187 (equivalent put call ratio of 0.53). The OEX put call ratio is equally lukewarm.
ISE sentiment 10 day moving average Sep 2010 end
This is a bit frustrating but there’s nothing we can do if an indicator isn’t providing an edge.

Source: Sentiment Overview: A Slight Retreat in Optimism