This week the Investors Intelligence survey of newsletter editors is 46.7% bullish. That is the highest level of bullishness since May 2010. Another sentiment measure, much less known is the Rydex SGI Advisor Confidence Index (ACI).
This is a survey conducted monthly to gauge the sentiment among personal financial advisors and their outlook for the US economy as well as their stock market outlook. It is intended as the professional equivalent to the Conference Board Consumer Confidence Index which measures the average consumer’s sentiment every month.
Here’s a chart comparing the S&P 500 index with the ACI over the past few years:
The most current level of the Rydex SGI Advisor Confidence Index is 110.63 which is the highest level of confidence since July 2007 with a corresponding level on the S&P 500 index of 1455. Like other sentiment indexes, generally speaking, the ACI tracks the stock market and is a contrarian indicator.
In 2007 the ACI peaked on February 2007, well ahead of the October 2007 market top. And like many technical and sentiment indicators, it found a bottom in the dark days of October 2008 and by the spring of 2009 it was already climbing. Similar to other sentiment measures the current level doesn’t provide enough reason to see excessive bullishness on the part of financial advisors but it is not far off either.
But that confidence may mask the reluctance of the average financial advisor from pushing their clients into stocks. According to a recent WSJ article, a recent survey of advisors by Charles Schwab found that 77% are planning on maintaining or increasing the fixed income exposure of the portfolios they manage. This of course, has been the tendency of retail investors as we’ve seen in the flow of mutual fund data month after month.
The most recent preliminary data for the month of October shows this trend continuing with $9 billion flowing out of domestic equity funds and $25 billion flowing into bond funds.
Institutional Asset Allocation
Pension funds which are at the other extreme of the investment spectrum manage huge portfolios. But surprisingly, they have been taking a page out of the playbook of the US retail investor. That is, they have been actually reducing their exposure to equities and increasing them significantly towards fixed income.
According to McKinsey, there is an estimated $1 trillion movement away from stocks as pension funds attempt to reduce the perceived risk of future market volatility on their portfolios. In the heyday of 2000, pension funds had almost 70% allocation to stocks but that has dwindled to 45% (July 2010). If the trend continues, pension fund equity exposure will be at levels last seen in early 1990’s.
While this may seem contrarian at first, any bull should be concerned that such huge amounts of demand are being drained out of the financial markets. One of the reasons why we had such a strong bull market was the strong and persistent demand for stocks from both institutional sources like pension funds and retail investors through mutual funds.
Finally, I wanted to mention the opinion of two “greybeards” that I admire: James Stack of InvesTech and Steve Leuthold of Lethhold Weeden Capital. Both of them are bullish right now.
Stack wrote recently that the bull market has been “reconfirmed”. He bases his outlook on the “wall of worry” that the bull market is climbing and on the technical aspect of the market. Specifically, he looks at the low number of stocks hitting 52-week lows, believing that this is one of the signs of a healthy bull market. As well, Stack considers the current market to be very broad based and therefore, a healthy bull market. When the market leadership narrows, there is cause for concern of course, as less and less individual stocks are called upon to carry indexes higher.
In a recent interview Leuthold mentioned that he has between 60-69% exposure to the stock market believing that, at least, for the remainder of the year, we are going to see higher prices. But he is not very confident when he looks beyond the horizon into 2011 and 2012. As well, about half of his exposure is to global markets with a strong emphasis on Asia.