Sentiment Overview: Week Of April 22nd, 2011

Here is the sentiment overview for the Easter holiday shortened trading week:

Sentiment Surveys
Retail investor sentiment as measured by the AAII weekly survey continued to become more lackluster this week. The bulls declined to 32% while the bears were unchanged at 31%. The bull ratio was 51%, a few percentage points above its long term average of 58%.

Investors Intelligence
Equity newsletter editors likewise continued to curb their enthusiasm from the giddiness that we observed a few weeks ago. Slightly more than 54% are expecting higher prices while those expecting lower prices continued to increase from the record low levels to 19%. The bull bear ratio fell to 2.82:1 – this after reaching an astronomical 3.65:1 earlier this month.

The bull ratio (the percentage of bulls compared to the bulls and bears combined) fell to 74%. But we are still not out of the woods as it is still signalling a very overbought and overexcited market:

Even after ameliorating from its extreme of earlier, the current bull ratio is significantly above its 5 year average of 60%.

NAAIM Survey of Managers
The weekly sentiment of active portfolio managers increased back to levels last seen in February. Both the median and mean market exposure ticked up to 83%.

More interestingly, the difference between the two extremes is providing a signal that has historically been negative for the market. That is, if we take the most bearish response and the most bullish response and net them out and take a rolling average to cover a month’s worth of results, we have this chart:

What it shows us is how bearish and bullish the extreme poll responders are. Right now, the bearish are at best neutral (not bearish at all) and the bullish are uber-bullish to the max.

Dissecting the sentiment indicator this way gives us an insight that we would have otherwise missed outright by focusing just on the superficial NAAIM average. The latest figure is the highest for this metric (190% long net differential) and clearly, this has not been a good time to be long the market in the past.

Net Equity in NYSE Accounts
The aggregate amount of margin debt in customer accounts released by the NYSE is showing that once again traders are becoming very comfortable with risk taking. Total margin debt has surpassed $315 billion (above levels last seen in April 2007).

As well, if we remove the cash held by customers to measure the aggregate net equity held in their accounts, we find that it is back down to the levels last seen just prior to the 2007 market top (June 2007):

The Federal Reserve is pushing everyone back into risk taking activities after the credit crisis by reducing rates to near zero and keeping them there for a prolonged period of time. Clearly it is working. QE2 and QE1 have impacted the financial markets and equity markets as well as bringing credit markets back from the brink of collapse. The result is that holding a net cash reserve provides no return and therefore there is no incentive to hold it instead of another asset that can appreciate in value.

The current level of aggregate net equity is fast approaching two prior periods: summer of 2007 and fall of 2000. Both of these periods were immediately preceding important market tops. The difference is that unlike today, in both of those prior periods investors were not punished as they are right now by the Fed for holding cash. So the interest rate environment provides a context that makes this sentiment measure a bit less extreme.

Corporate Insiders
Data from Thomson Financial shows that once insider activity is moderately bullish. The last two times we had a cautionary signal from this indicator was in October 2010 and February 2011. Both of those were valid warnings. But the current levels of corporate buying relative to selling are not alarming:

Volatility
The VIX volatility index closed below 15 this week. That is the lowest level we’ve seen for this volatility measure since the summer of 2007. While that may ring alarm bells in your head about a potential market top, remember that low VIX levels do not correspond to tops the way that high VIX levels correspond to market bottoms.

However, Jason Goepfert (of SentimenTrader.com) pointed out an interesting dichotomy between the CBOE VIX index and the new Credit Suisse Fear Barometer. While the VIX index is at a 52 week low, the CSFB is at a 52 week high indicating that traders are paying a premium to purchase puts relative to calls. There are only a handful of times when these two disparate volatility measures have been similarly at odds but as precedents go, it is clearly negative for the market going forward.

Fund Flows
According to ICI retail investors in the US added $495 million this week to domestic funds and an additional $340 million to foreign funds. Lipper FMI reports $1.8 billion going into domestic mutual funds and $0.48 billion overseas.

From ICI data, taxable bond funds once again where the destination of choice attracting $3.6 billion in the week. Lipper FMI corroborates reporting taxable bond funds receiving $2.2 billion for the week ended April 20th.

Municipal bond fund had their 23rd consecutive weeks of outflows as both Lipper FMI and ICI reported an additional $1.2 billion being withdrawn by investors from that space. This is surprising as it seemed that this area of the bond market was healing. But the past 3 weeks have opened up the wound as the rolling 4 week average once again approaches the $1 billion mark as it did in early March.

Interestingly, for the week, $1.2 billion was withdrawn from QQQ and SPY ETFs which provides a contrasting view from the mutual funds fund flows hinting that short term traders are not as bullish on the market as it would first seem.

Options Sentiment
Option trading this week was marked by a surprising lack of optimism especially compared to the ability of the bulls to halt the recent correction and push the market back up to its prior resistance levels. The ISE Sentiment Index (equity only) actually dropped lower on Wednesday (April 20th) even though the S&P 500 index and all other major equity indexes put in a very powerful performance.

The 10 day moving average of the equity only ISE call put ratio fell to just 201. There is a slight possibility of questionable data integrity due to some glitches but if the data is revised I’ll follow up with an update.

Similarly, the CBOE put call ratio (equity only) was rather subdued this shortened week. The short term moving average of the traditional put call ratio rose to 0.62 which is a bit puzzling. If we look at the recent tops we can see that usually they have been accompanied by much more enthusiasm from option traders:

But now that the S&P 500 is once again back at the resistance levels and within reach of breaking out of the head and shoulders continuation pattern, suddenly option traders are nonchalant at that feat.

In contrast to the prior option indicators, the CBOE S&P 100 index option ratio is continuing to hover at extreme highs indicating that the ‘adults’ in the option pits still prefer puts to calls by a wide margin. The 10 day OEX put call ratio closed the week at 1.98 and the 10 day put call open interest ratio at 1.69 (very close to its prior highs at 1.78 in mid-March). The combination of the elevated open interest and the put call ratio is troubling from a historical perspective.

Forex: Euro Dollar Cross
With the much ballyhooed S&P credit downgrade of the US debt, the US dollar suffered an ignoble trouncing. It is hilarious that a credit rating agency that missed the credit crisis completely (and by many accounts used it to profit through multiple conflicts of interest and outright fraud) is now considered so savvy that their analysis is given currency on Wall Street.

In any case, the reaction pushed the US dollar index to just slightly below its December 2009 levels. US dollar sentiment likewise is atrocious. The DSI is down to 5% and the Sentix sentiment for the US Euro cross is showing investors disdain at levels that correspond to Euro tops (and US dollar bottoms):

In contrast, the FXCM Speculative Sentiment Index for the Euro/Dollar is showing that forex traders are still “fairly net short the Euro against the US Dollar, showing few important signs of relenting and giving contrarian signal to stay long into EURUSD rallies”. More than twice as many forex traders are short the Euro against the US dollar.

Silver
Investors Intelligence advised its clients that silver and the iShares Silver Trust (SLV) is “…purely for speculators” and that “we would avoid SLV with a barge pole as when it turns the decline will be sharp and deep”. This has basically been my stance as well for a while now, for more details, see: Sprott on Silver. I understand that it is painful for many to sit back and watch the parabolic rise in price. It has an almost irresistible allure (especially for the less experienced, emotional retail trader). But history is replete with parabolic price charts and their aftermaths are devastatingly sever undoing months and months of gains by the bulls within hours and days.