A contrarian indicator? With equities selling off hard, AAII's sentiment survey for the week ending Jan. 29 shows a 590 bps drop in bullish sentiment to 32.2%, and a 900 bps increase in bearish sentiment to 32.8%. Neutral sentiment is down 310 bps to 35.1%.
Bullish sentiment is now well below a long-term average of 39%, and bearish sentiment moderately above a long-term average of 30.5%.
It's the bull market everyone continues to hate ... BAML's sell-side indicator - a contrarian take based on attitudes of strategists - continues to read in extreme bearish territory, suggesting more gains ahead for stocks. The level of bearishness now is actually greater than that of the March 2009 market bottom.
The financial crisis changed nothing, writes Vanguard's Fran Kinniry: Investors continue to chase returns, and have lately been jettisoning fixed income for stocks. Driven by the 4th greatest bull market on record - a cumulative return of 198% since the bottom - global equity allocation for investors has increased to 57% from 38%, and vs. the 20-year median of 51%.
It's probably time for the typical investor (one with an equity-heavy portfolio) to maintain a prudent allocation by directing new cash flows into bonds, while selling stocks - the exact opposite of where money is flowing today.
"Rebalancing usually seems counterintuitive at the time when it promises to be most effective," says Finniry. "It can be difficult to implement from a behavioral standpoint and requires incredible discipline." With equities partying and the near-universal belief of higher interest rates on the way, who could blame an investor for not wanting to sell stocks and buy bonds.
"It is very common following significant gains in the equity markets for investors to question the benefits of rebalancing," but it's never "different this time;" instead it's the "same as it ever was."
"I cannot look at myself in the mirror," says Hendry at an investor conference. "Everything I have believed in I have had to reject. This environment only makes sense through the prism of trends."
"I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years' time."
Fully aware he may be ringing a bell as the last bear to throw in the towel, he tells the audience it would be well within its rights to sell. But for now: "Crashing is the least of my concerns. I can deal with that, but I cannot risk my reputation because we are in this virtuous loop where the market is trending."
Declining 4.8 points to 34.4%, bullish sentiment in the AAII Investor Sentiment Survey is the lowest since just before when everybody knew the Fed was going to taper in September. The long-term bullish average is 39%.
At 29.5%, bearish sentiment is about inline with the long-term average of 30.5%. Neutrals at 36.1% compares to the 30.5% long-term average.
"Everyone is worried that they are not worried about anything because no one else is worried about anything," writes Morgan Stanley's Adam Parker of the stock market. "We are Bob Marley."
Wrongly bearish for 2012 and early this year, Parker changed his tune in March, but the market has run well past his end-of-year forecast. He's not ready to ring a bell; instead Parker's waiting for evidence of excessive corporate spending and risk-taking as signaling a top. Right now though, companies remain in cost-cutting mode and have been prudent about mergers.
“We conclude that we can’t be at the top of the cycle until risk to earnings grows, and that won’t happen until hubristic behavior accelerates and debt is on the doorstep of having to be refinanced, ostensibly at higher rates or in a less available market."
"Equities are roughly linear, debt isn't," reminds Citi's Matt King as he warns of a massive debt bubble. He posts a chart (slide 4 of presentation) of Lehman's stock price vs. bond price in the time leading up to the collapse - the stock price declined steadily over a 2-year period, while the bond trundled along until it went from about 70 cents to the dollar to zero in an instant.
Developed economies are as dependent on credit growth as they ever were, he argues, and the debts of the last cycle have not been written off, but instead covered up. What's more the "illness" of credit dependence has spread to emerging markets.
Conclusion: "Buy the best seats, but sit near the exit," another way of saying he prefers uncrowded high beta trades (stocks) to crowded low beta trades (fixed income).
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