Sentiment Overview: Week Of January 21st, 2011

Here’s the summary of sentiment data for this past week:

Sentiment Surveys
The weekly AAII survey of US retail investors continued to fall for the second week in a row while delivering the majority to the bullish camp with 51% believing that 6 months from now, stock prices will be higher. The bears also fell slightly from last week (24%) to 29%, thus bringing the bull ratio down slightly to 64%. This means that 64% of those that are decided (either bullish or bearish) are optimistic – that isn’t much higher than the long term average of the bull ratio at 57%. The level of relative bullishness has fallen significantly from just before last Christmas when the bull ratio reached a cycle high of 79.4%.

Investors Intelligence
The II survey of newsletter editors was similarly little changed from a week ago. According to ChartCraft, 56% of stock market newsletters were bullish while 21% were bearish. This brings down the bull bear ratio down from 3:1 to 2.7:1. But it should be noted that the bull ratio has been hovering above 70% ever since mid-November 2010.

NAAIM Survey of Active Managers
This week’s NAAIM survey results were in line with the recent trend. The median exposure to the market was 85%. Similar to the II ratio, this sentiment indicator has been hovering above 80% for the past 11 months (since mid- November 2010). Meanwhile, the average exposure continued its slow march lower for the 5th week in a row to fall to 71%. Here’s a chart of the median compared to the S&P 500 index:

Consensus Bullish Sentiment
The Consensus survey continued ticking higher this week to finish at 73%. This is the highest bullish level since April-May 2010. And it means that bullish sentiment has more than doubled after falling to a low of 35% in July 2010. There is little room left until it reaches the extreme level of 75% – the level which caused the market to fall in April 2010 and in October 2007.

Market Vane Sentiment Survey
Market Vane’s bullish percent is also reaching for the sky, claiming a bullish 65%. This may not seem high but it is well past the the highest bullish percent levels we saw it reach in January 2010 and April 2010 – both intermediate market tops. To find a higher bullish sentiment for this survey we’d have to go back to October 2007 when it almost touched 70% bullish.

Bank of America Merrill Lynch Survey of Fund Managers
According to the latest ML survey of institutional money managers, 55% are overweight global equities – a 10% point jump from last month and the highest level of bullishness since July 2007, just as most equity markets were forming a top. A net 27% are overweight US equities – the highest since November 2008.

As much as they love stocks, the managers seem to loath bonds with a 54% underweight – an increase of 7% points from last month. This confirms the TrimTabs/Barclay Hedge survey of hedge fund managers from just a few weeks ago which showed 53% bearish on 10 year US Treasuries.

With an overall positive outlook, 55% of surveyed managers expect the global economy to grow and 39% expect “above trend” growth. This in turn is expected to stoke inflation; 72% expect higher inflation compared to just 48% in November 2010. But these higher expectations of inflation are not being accompanied by a serious concern for rising interest rates since most believe that the Federal Reserve will wait until the end of 2012 before embarking on a tightening cycle.

Within the regional surveys, India came out as the most unloved with a -35% (underweight) among emerging markets, followed by Asia Pacific at -21% (underweight). Finally, a net 19% expect that China’s will weaken this year – a complete about face from two months ago when a net 16% believed that it would grow.

ABC News Consumer Comfort Index
The headline number for the ABC News CCI fell to -43. The consumer sentiment index was very close to closing above -40 this week, a level which it has not done since April 2008:

But there are some small indications that the beleaguered US consumer may finally be seeing a ray of sunshine. The ABC News Economic Expectations index shows that for the first time more (33%) US consumers believe that the “economy is getting better” than those who believe (23%) that “the economy is getting worse”. This positive gap is the largest since March 2002.

German Sentiment
Things may be rotten in Europe but according to the Ifo Business Climate survey, the German economy is running at full speed. The monthly survey results show that January confidence in the current business climate (blue line in graph below) is at 110.3, slightly ahead of the expected 110. The future expectations index was 107.8 (green line):

Both confidence indicators in the German economy have not only recovered sharply from their low 2 years ago, they have both now gone on to break the record and reach the highest levels in the history of the survey, going back all the way to 1991.

Mutual Fund Flows
According to ICI, retail investors are now coming back to US stocks. One week does not a trend make but it is still notable that the past week had domestic equity funds receiving $3.8 billion of inflows. This is the highest single weekly inflow since May 13th 2009 and if the trend continues for the rest of the month, it will be the first month with a positive inflow since April 2010.

Foreign mutual funds continued to receive lavish attention with an additional $ 2.8 billion bringing the January total (so far) to $5.2 billion. If this trend continues, it will be the fifth consecutive month of positive flows for international mutual funds.

January usually sees positive mutual fund inflows but for the past few years that has meant little as most of it and then some leaves during the rest of the year. The contrarian viewpoint is difficult to ignore since retail investors seem to be finally eschewing bonds at a time when they have been in a slump and are unfavored (even by institutional managers) and they are returning to equities after a 90% increase in their price since the bear market low in March 2009.

Maybe I’m just talking my book because I’m bearish on equities and bullish on bonds for a trade but then the same charge would have to be leveled at David Rosenberg of Gluskin Sheff who said recently:

You’re starting to see the retail investor pile into stocks now that the market has nearly doubled. Is it a classic sell signal? The answer is unequivocally yes.

Curiously, we are also starting to see more and more of that endangered species, daytraderus overconfidentii, emerge from its natural habitat. According to Charles Schwab, clients added $26.2 billion in new assets in the fourth quarter of 2010. Client equity assets grew 22% from the previous fourth quarter (2009). That of course isn’t surprising considering the unprecedented bull market rally that we’ve seen.

There is evidence that more active US investors and traders are finally responding to the clarion call of higher prices. Schwab’s inflows last quarter were 79% higher than the third quarter of 2010 and the highest since the end of 2008.

TD Ameritrade meanwhile states that they received an inflow of $9.7 billion from their clients. And even more telling, in the last quarter of 2010, there was a 31% increase in margin lending. This of course is the telling footprint of aggressive investors and traders who leverage their assets with the goal of increasing returns.

No one is claiming that we are back in the heady days of the late 1990’s where taxi drivers would quit to daytrade IPO’s. But we are (finally) seeing some US market participants being seduced back into stocks.

In my previous discussion of the “Sheeple Index” I had overlooked Schwab:

As you can see from the graph above, their website traffic has been increasing rapidly – a sign of increased activity from their clients and consequently, trading volume.

Municipal Bonds
This week we continued to see the rout in the municipal bond market. Articles in the New York Times discussing “quiet” ways that states are seeking bankruptcy proceedings is not helping. According to ICI figures, another $2.4 billion was sold from the sector this week. Rolfe Winkler suggests that we put away the voodoo dolls of Ms. Whitney and instead blame the always scapegoatable Ben Bernanke.

Whomever we choose to blame, it doesn’t look like the hemorrhage is over. According to flow data from Lipper FMI, for the week ended this Wednesday, investors withdrew $4 billion from municipal bonds. This marks the tenth consecutive weekly outflow totaling $20.6 billion (and counting). This one week outflow eclipses the previous record set in November 2010 ($3 billion) to be the largest single weekly outflow since Lipper began tracking the sector in 1992.

Yields in municipal bonds have risen so much that “crossover” fixed income buyers (from taxable bond markets) are coming in to this tax exempt market. These crossover purchases were not enough to stem the record outflows but they were enough to push down the yield (and push up the price) of top rated municipal bond to a two month high.

Here is Thomas Doe of Municipal Market Advisors talking with CNBC about the conditions in the municipal bond market (note that Doe is not biased since he is merely a consultant and researcher, not a trader):
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My personal take on this is that the sentiment is at an inflection point. We have an extremely fearful investor population – one that is especially skittish since the municipal bond market is considered a risk-free haven.

The municipal bond index has fallen the most since the 2008 bear market in reaction to the forced selling from municipal bond mutual funds. Mutual funds hold about 19% of the $2.9 trillion market but if they are facing redemptions, they have no choice but to sell. As well, consider that most of the municipal bond closed end funds trading on stock exchanges have gone from considerable premiums to trading at discounts.

As an example, here is BlackRock Municipal Bond Trust (BBK), which fell to a -1.88% discount on January 14th 2011 – as you can see, the normal condition is a premium:

Option Sentiment
The ISE Sentiment index failed to show any significant decrease in call buying. There were only two days during the week – Wednesday and Thursday – when the call put ratio fell below 200. That was still enough to drag down the 10 day moving average of the ISE Sentiment index from its high of 267 last week to 233 this week.

The CBOE equity only put call ratio showed similar apathy towards lower prices. The 10 day moving was unchanged at 0.51. However we did see a single day put call ratio spike up to 0.69 (on Thursday). Since normally I’d prefer to see 1.0 or at least 0.90 this amount of put buying may not seem like much. After all, it has been quite a while since we saw that much fear in the options market – May 20th 2010 to be exact.

But Thursday’s put call ratio was the highest since the last day of trading in December 2010. That was enough in these bullish conditions to push the market higher for a few weeks.

Having said that, if this does provide support as it has multiple times during this rally (December 31st, 2010 – November 23rd, 2010 – October 19th, 2010 – September 22nd, 2010 – August 31st, 2010 – etc.) then it will be rather temporary. This is because the general state of the options market is rather overbought with averages showing a dominance of optimistic call buying.

The S&P 100 index’s put call ratio is continuing to behave in a baffling see-saw fashion; rising, falling, then rising sharply again and repeating it all over again. But if we ignore the put call ratio and instead look at the open interest put call ratio, we see a rise in calls. And this historically corresponds to market tops.

Gold Sentiment
A quick update on the developing sentiment picture in the gold sector:

The Hulbert Gold Stock Newsletter Sentiment index has fallen even more. The last time we checked in, it was at 33.6% (see above link). This week it fell to 26.9%.

The Rydex traders continue to abandon the precious metal at an increasing rate. This week the total assets in the Rydex Precious Metals fund fell 36% from its recent peak. Gold in contrast, has only fallen about 6% from its recent high. As you may recall, two weeks ago, the Rydex assets had fallen 15% in response to a decline of just 4% in gold (for chart, see: ). This asymmetrical reaction from the Rydex traders is to be expected of course. And before we can see a lasting floor, we’re probably going to see more selling.

The Central GoldTust closed end fund (GTU) fell to a discount, trading 1.5% below its NAV this week. We hadn’t seen this specialized closed end fund fall to a discount since November 2010 and before that September 2008.

We are also starting to see negative headlines like this from the WSJ: From China, Signs That Gold’s Rally Isn’t Endless.

As well, CFTC commitment of traders data shows that open interest figures are falling. Large speculators have reduced their net longs to levels not seen since mid-to-late 2009. The ‘smart money’ commercials, meanwhile, have increased their net longs since the same time period.