Here is this week's summary of sentiment data for the markets:
The weekly AAII survey of US retail investor sentiment continues to show there is a healthy degree of optimism about the stock market. Those who believe the stock market will be higher 6 months from now decreased slightly from 49% to 47.1% but those who were pessimistic also declined (27.7% to 26.8%).
That left the bull ratio relatively unchanged at 64%. The bull ratio is the percentage of those who are bullish relative to those who are not neutral. We’ve had an elevated bull ratio (64% or higher) 4 times out of the past 5 weeks. But we aren’t yet at the 68% bull ratio that has corresponded with recent market tops.
The Investors Intelligence survey of newsletter editors is showing a similar amount of bullishness, without managing to reach critical junction that usually corresponds with tops:
This week the bears decreased to 24.7% and the bulls increased to 47.2% bringing the II bull ratio to 66%. Right now we are seeing approximately twice as many bulls as bears. While that may seem like a lot, previous tops like the April one were marked by three times as many bulls as bears.
Hulbert Newsletter Sentiment
The Hulbert Stock Newsletter Sentiment index (HSNSI) is another measure of the sentiment of newsletter editors and it is providing a slightly less bullish picture. The newsletters that try to time the general stock market are, on average, recommending an exposure of 25.9% long (meaning that they advise their clients to invest 25.9% of their portfolio in the stock market).
This is a very muted reaction to the kind of rally we’ve seen. Usually, the HSNSI rises along with the stock market so anything out of the ordinary like this is noteworthy. To put this in context, the HSNSI was 56% in early April and it managed to increase slightly to 65.5% by the end of that month. Of course, the most contrarian bullish pattern is to see the HSNSI decrease in the face of a market rally like we saw in July. That hasn’t happened but the current number shows that newsletters are not too eager to jump in.
NAAIM Survey of Manager Sentiment
This week the survey of active managers shows a continuing move towards more long exposure. The average fell slightly to 67% from 76% but the median exposure rose to 80% - the highest since April 21st. As well, the amount of dissent amongst the respondents to the poll continued to decrease, suggesting that we have a growing consensus about the bullish stance.
Since its start, the metric has been 80% or higher 25% of the time so it isn’t all that rare to see this much bullishness. But this is not yet an extreme level indicative of a bullish climax for two reasons. The median is not quite as high as in previous tops (90-100%) and the average is still quite low, having reached 86% at the April top.
As the chart shows, they are now as bullish as they were in April and January of this year. Of course, both of those dates corresponds to intermediate market tops.
Mutual fund flows continued according to their established trend: $5.6 billion was withdrawn from domestic equity fund and $7.8 billion was deposited into bond funds. If that weekly trend continues for the rest of the month we’ll see the largest outflow from US equity mutual funds since May 2010. Foreign equity funds received a surprising $1.2 billion of inflows, almost the same amount as they received for all of last month.
According to TrimTabs Investment Reseach and Barclayhedge, September provided $11 billion of inflows for hedge funds - the largest amount since May 2009. Not surprisingly, equity oriented funds performed the best, especially those geographically focused on Asia (ex-Japan) and China.
The ISE and CBOE option sentiment indicators were relatively unchanged this week. The 10 day moving average of the ISE Sentiment index (equity only) call put ratio was 202, compared to last week’s 203. This is relatively elevated but it isn’t showing enough call buying to warrant an extreme label.
The 10 day moving average of the CBOE put call ratio (equity only) fell slightly from 0.593 to 0.573. Usually we see market tops correspond to the low 0.50’s so we’re not quite there yet.
This week I wanted to take a closer look at the S&P 100’s put call ratio since it is showing a different picture than the other option sentiment metrics. I’ve referred to this ratio a few times in passing and it is important to note that usually it is interpreted differently from the other option ratios. Whereas the CBOE or ISE ratios are interpreted through a contrarian lense, since the OEX options are deemed to be the territory of ’smart money’, they are taken at face value.
As you can see from the above chart, relatively high levels of puts traded are bearish for the market. Right now, however, we are seeing a persistently high degree of call activity in the OEX options. This is noteworthy since the usual pattern is for the ratio to climb along with the market. In recent history, we can compare this to early 2010 when we saw a similar persistent amount of calls traded (relative to puts) as the market rallied.
US Dollar Sentiment
Here’s another look at the US dollar sentiment via the Daily Sentiment Index. As you can see from the chart, the recent level of pessimism is not only lower than what we saw at the most recent low but it is lower than when the dollar was able to put in a much lower bottom in late 2009:
Source: Elliott Wave International
With the advent of another round of quantitative easing, the premise that this will mean the demise of the US dollar is becoming an accepted inevitability. The more stark scenarios continue on with a devaluation leading to a currency war breaking out between major central banks as they race each other to the bottom.
Those that believe and/or peddle this doom and gloom conveniently forget the experience of Japan. There, major quantitative easing by their central bank has actually resulted in a stronger Yen. And amusingly enough, a Yen that has been providing asset allocators with one of the few places to hide amid the increasingly correlated financial markets.
Paradoxically, the same group that is advancing this apocalyptic scenario is the same group that otherwise believes in the overarching power of markets, especially pitted against a group of bureaucrats. But somehow, they put aside their usual disdain for central planning and for just this one scenario, actually believe that a committee of PhD’s are capable of manipulating the market.
I realize that being a dollar bull right now is incredibly unpopular and such arguments are easily derided. As a contrarian though, that just reinforces my conviction that we are about to see a major inflection point very soon.