Sentiment Overview: Bulls Charge Again

Includes: DIA, QQQ, SPY
by: Babak

Here is the sentiment summary for this shortened trading week:

Sentiment Surveys
Hard to believe it was just three weeks ago that retail investors showed some meaningful amount of concern. As you may recall, in late August the AAII bull ratio fell below 30%. This is an arbitrary “line in the sand” that I watch as a signal that we’ve arrived at an extreme.

The S&P 500 had fallen towards the lower end of its summer trading range and it quickly rebounded. Now, it is close to the top of the summer trading range. And now, suddenly retail investors are feeling just fine (again). The bull ratio this week is slightly above 58% with 44% forecasting the market to rise and 32% believing it will fall:

aaii bull ratio Sep 2010 update

This level of overall bullishness is the highest since late April 2010 and the highest percentage of bulls since mid April, just as the market made an important top. The nominal level of bullishness isn’t the only thing that concerns me. It is also the fact that retail investors have a very short attention span and are willing to forgive and forget at the drop of a hat. Until we see true capitulation (with continuing reluctance to jump aboard an ensuing rally) it is difficult to see a way out of this choppy malaise.

Investors Intelligence
Newsletter editors rekindled their optimism this week with 33.3% registering as bullish in the weekly Investors Intelligence survey. The bears fell from last week to bring in an almost equal opposition at 32.2%. This brings about a recovery from last week’s extreme but keep in mind that the bull ratio Investors Intelligence survey has been declining since hitting a high in late April 2010.

Daily Sentiment Index
The DSI for the S&P 500 index is at 71%. This is an elevated level of bullishness but not an extreme that provides us with a definitive edge. Much like many of the of the other sentiment indicators, the DSI is signaling an above average sense of optimism within retail market participants. But it is still far from a giddy sense of entitlement to higher stock prices.

NAAIM Survey of Active Managers
Active money managers, as measured by the weekly NAAIM survey continue to be ambivalent about the market. The average exposure shrunk this week slightly to 48% long the market from 53% last week. The median exposure was 50% long for the fourth consecutive week. According to the numbers, active managers can’t make up their minds one way or the other like most other participants in the market and are waiting for a resolution of this sideways trading.

Here is the chart comparing the median NAAIM survey results with the S&P 500 index for the past four years:

NAAIM survey of manager sentiment Sep 2010

The only other noteworthy aspect of this week’s NAAIM sentiment survey was the high variability in the answers. That is to say while the average and median show little change, within the data there is a much higher dispersal suggesting that individuals are all over the map. This isn’t that surprising since sideways choppy trading by definition requires people to have few convictions and feeble herding instincts.

Consumer Survey
The extremely poor US consumer sentiment won’t surprise anyone. According to a recent CNN/Opinion Research survey 81% say that the economy is ‘”poor” and only 18% as “good”. Interestingly most people blame Republicans and previous president, George W. Bush, for the economic weakness.

Mutual Fund Money Flows
The well documented exit from equities continued this past week with US mutual fund investors cashed out almost $7.6 billion worth of US equity mutual funds. While the trend of selling US equities has been ongoing for some time, this is a significant intensification of the selling. Consider that in just the first week of the month they have sold an amount almost equivalent to the whole month of June (when investors withdrew $8 billion for the whole month from US equity funds).

This is the worst showing since the last week of May. And if it continues for the rest of the month, it will be the worst month for mutual fund flows since October 2008. However, the month has just started so we shouldn’t count our chickens before they hatch. As well, this is a preliminary number and it will most likely be adjusted slightly going forward.

Rydex Market Timers
Market timers that use the Rydex family of mutual funds have significantly pulled in their horns recently:
rydex ratio Sep 2010

Gold Sentiment
While equities have been treading water, gold has slowly crept up and is now very close to its multi-year high. It closed today at $1246.20 - slightly below the intraday high of $1265 on June 21st 2010. While the precious metal is within striking distance of a break-out, you might want to keep the champagne in the fridge.

According to Hulbert Digest’s Gold Newsletter Sentiment index, the average exposure recommended by newsletter editors that try to time the gold market is now at 52.1%. This isn’t an extreme from a historical perspective - the HGNSI has peaked at 73% in April 2006 for example. But recently, when the recommended level of gold exposure has risen above 50% - as it did in June 2009, October 2009 and once again in December 2009 - the secular gold bull has had a tough time continuing on its merry way upward.

Option Sentiment
There was little change in the option sentiment picture this week. The CBOE put call ratio (10 day moving average) rose slightly from 0.59 to 0.597 and the ISE sentiment index was little changed at 175 calls for every 100 puts - an equivalent put/call ratio of 0.57 - similar to the level of the CBOE put call ratio. It is frustrating when indicators don’t give us a strong signal but there isn’t much we can do.

Generally speaking, options are betraying an above average level of bullish sentiment but not anything that can provide a real edge in the intermediate time frame. For charts, please see last week’s sentiment overview (scroll to bottom).