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Here is this week’s overview of sentiment data:

Sentiment Surveys
The AAII weekly survey continues to hover at twice the number of bulls (49.6%) to bears (25.2%). The bull ratio climbed slightly as a result to 67% - the highest level since mid-September. A short term 4 week moving average smooths out the data and shows that we are now seeing the highest level of bullishness from retail investors since April:

AAII bull ratio 4wk MA Oct 2010

The other occurrences in recent history are October 2007, February 2007, November 2006, April 2006 and February 2006. The only instance which did not result in either a correction or a sideways rangebound market was November 2006 when the S&P 500 index continued to rally right into February 2007.

Investors Intelligence
The sentiment in newsletters was little changed as the bulls declined to 45.1% and the bears also declined to 22%. So similar to the retail investor’s sentiment above, we are seeing twice as many optimists as pessimists. The bull ratio has now risen for the past seven consecutive weeks to reach 67%:

investors intelligence bull ratio Oct 2010 update

While this is high, we are looking for an even more lopsided scenario with three times as many bulls as bears. This is what we saw at the market top in the recent top in April.

Daily Sentiment Index
The Daily Sentiment Index for the S&P 500 index, which is a good representative for the equity markets, hovers around the 90% level signaling an extreme in retail trader optimism. Here is a chart comparing the 10 day average of the S&P 500 index DSI with the S&P 500 index itself:

SPX DSI sentiment 10d MA Oct 2010
Source: RMG Wealth (data from trade-futures.com)

NAAIM Survey of Manager Sentiment
This week the survey of manager sentiment from NAAIM was little changed with the median exposure still at 80% long and the mean or average climbing slightly to 72%. We don’t have a lot of data for this sentiment survey since it started just four years ago but we’ve never seen a market top correspond to this level of bullishness. For a chart, please see last week’s sentiment overview.

Merrill Lynch Survey of Fund Managers
According to the latest ML survey of institutional managers, portfolios are taking on more risk with a net 27% overweight equities (compared to net 10% in September). Managers are continuing to underweight bonds and put their cash to use - just 6% are overweight cash compared to 18% last month. Most of the money destined for equities is flowing into emerging markets - a 17% point increase in managers overweight emerging markets from last month (to 49% net).

As well optimism about China’s economic ability to grow is ramping up. Now a 19% expect China’s economy to grow, an 8% point increase from September’s and a 19% point increase from August.

Regarding the dollar, a net 45% believe it to be undervalued (and increase from last month’s 18%). But only 12% expect the US dollar index to be higher within 12 months. On the flipside, 45% believe the Euro to be overvalued (compared with just 17% last month). And when it comes to gold, 24% (double the level from last month) believe it to be overvalued.

Corporate Insiders
Company executives, directors and large shareholders (those considered “insiders”) have started to sell with last week’s sell to buy ratio reaching 5.29 according to Vickers Weekly Insider Report. Some of that intense selling may be due to pent up supply which was restricted from entering the market due to the earnings season.

According to data from Thomson Financial corporate insiders are selling at similar levels that we saw in April and in late 2009:
insider transaction ratio Oct 2010

Mutual Fund Flows
According to data from ICI this week we saw an additional $623 million withdrawn from domestic equity funds. A robust $1.4 billion was added to foreign mutual funds - the 6th consecutive week of positive inflows for this category. And as expected, another $5.4 billion went into fixed income.

According to Lipper FMI, high yield bond funds received $347 million for the week ending October 20th, an increase from the previous week’s $240 million. As well, money flowing into municipal bond mutual funds more than doubled to $420 million.

Volatility
Stock market volatility remains at very low levels. The CBOE VIX index closed at 18.78 this week, similar to levels at the end of April. The Nasdaq VXN index at 20.42 is slightly higher, both nominally and relative to its April levels.

Option Sentiment
The option market is not offering much insight. The ISE sentiment index which measures retail option trading sentiment fell slightly as the 10 day moving average of the equity only ISE call put ratio declined from 202 to 191 this week. This suggests that option traders lifted their feet from the gas peddle slightly but are continuing to buy almost twice as many calls as puts to open a trade.

The CBOE put call ratio (equity only) similarly shifted higher with the 10 day moving average rising to 0.602 from last week’s 0.573. That is an equivalent of 166 calls for every 100 puts.

The OEX (S&P 100 index) put call ratio meanwhile is unchanged from last week’s level and continues to suggest that the smart money is trading more calls relative to puts. Since there is little change, for a chart, please see last week’s sentiment overview

Gold Sentiment
In case you missed it, check out the previous post which goes into detail about gold’s current sentiment situation.

Source: Sentiment Overview: The Bulls Hang On