Sentiment Overview: Week Of April 29th, 2011

Here is this week’s sentiment overview of the financial markets:

Sentiment Surveys
Equity sentiment for the US market as measured by the retail AAII weekly survey was little changed from last week. Those believing that the S&P 500 index will be higher in the next 6 months were 37.9% (a small increase) and those expecting the market to decline were 30.6% (unchanged from last week). The bull ratio rose to 55% – again, very close to its long term average at 58%.

Right now we are not seeing a clear consensus from this sentiment survey as the bullish and bearish camp are almost equally divided. The last time we saw an extreme consensus was in late December when the bull ratio spiked to 79%.

Investors Intelligence
Newsletter editors as measured by the weekly Investors Intelligence survey are continuing to be extremely optimistic with the majority (54.3%) expecting further price increases. Those expecting lower prices are scraping the bottom of the chart at 18%. While this is a tad higher than the minimal 15.7% that we saw in early April, it is still enough to provide us with a contrarian signal.

As well, the smoothed 4 week moving average of the bull ratio is now at a multi-year extreme (76%). This means that over the past 4 weeks, more than three quarters of the “decideds” are bullish. Here is a chart comparing the bull ratio average of the Investors Intelligence survey with the S&P 500’s performance:

As you can see, this much expectations have usually resulted in a market top (or pause at least). The current level is the highest share of bullishness we’ve seen from the II since late June 2003. Back then, the equity market was screaming higher from the bear market lows of March 2003. Almost without pause or correction the market had gained 30% in those short months resulting in an ebullient bullish sentiment. The result was a range-bound sideways market that lasted about 4 months.

NAAIM Manager Sentiment
This week’s survey of active money managers provides us with a continuing bullish outlook as before. The average and median market exposure taken by the managers polled remains basically unchanged at 82%. Since we’ve easily seen the exposure jump to 90-100% this itself isn’t an overly high level of bullishness. However, the current optimism is marked by a lack of almost any managers being willing to short the market.

That is, everyone polled by the NAAIM was either extremely bullish on the market (200% long) or just neutral. For the past five consecutive weeks, the most bearish position has been to be neutral (as opposed to up to 200% short).Therefore, the overall average may not be high enough to warrant a contrarian caution but the fact that we have so much crowding and consensus among those polled shows that there is quite a bit of bullish “group think”.

Market Vane
The Market Vane Bullish sentiment ticked up 8 percentage points this week to reach 65%. This is the same area where we saw it last at the February 2011 top. Historically this market sentiment survey has coincided with major market tops at ranges between 70-75%.

Sentix Equity Sentiment
The Sentix short term sentiment measure for US equities (S&P 500 index) is approaching overbought at 40%:

The Sentix medium-term sentiment measure for the S&P 500 index meanwhile is trending downward to neutral:

Barron’s Big Money Poll
The recent semi-annual Barron’s roundtable or “Big Money Poll” covering 152 money managers gives us a stupendously bullish outlooks on US equities we’ve seen from this measure. A small part of that bullish consensus is due to the general optimistic outlook with 59% being either bullish or very bullish and the other, much larger part, is the lack of bears – only 10% are bearish and 1% very bearish. So the bull ratio is 84%, the highest in the history of this poll.

And as usual, the Barron’s crowd hates fixed income. The vast majority (87%) are bearish on US Treasury bonds and only 2% bullish. And only 1% believes that bonds will outperform the other asset classes. When it comes to commodities, they are much more bullish on oil than gold. As with most sentiment polls, this one is most useful when it is mired in deep pessimism towards equities. Otherwise, it provides little edge.

Here’s the cheat sheet for the Barron’s Big Money Poll:

Consumer Sentiment
The final number for the Thomson Reuters/University of Michigan consumer sentiment survey for April was 69.8 slightly above both expectations (69.6) and the preliminary data point at mid-month (69.6). The US economy added 216,000 jobs in March and the unemployment rate fell to a two year low, 8.8%. But the increases in gas prices is countering the employment recovery to keep consumer sentiment muted. While consumer sentiment has lifted from the depths of the 2008 bear market, it is continuing to lag the recovery in the US stock market.

IPO Market
After a few months of timid advances, the US IPO market is roaring back to life. According to data from Renaissance Capital, in April we’ve already seen 21 deals totaling $5.6 billion and providing an average return of 18% to investors. Another 31 companies have filed with the SEC to go public, the highest level of pipeline activity since August 2007. The momentum is clearly building as half of those filings were made in the final weeks of the month. The sector enjoying the most activity is the Technology sector with 15 IPOs so far this year.

Initial Public Offerings are a measure of the stock market’s health. As well, they can provide us with important signs of overheating or extreme pessimism. We are now fast approaching levels that have historically marked important market tops (or at the minimum pauses).

Mutual Fund Flows
According to TrimTabs US equity funds received $4.2 billion in net inflows this month (through April 27). Data from ICI for the month to 27th shows a net inflow of $1.93 billion and for the most recent week a net inflow of $1.93 billion. Lipper FMI in contrast reports just $400 million of inflows for domestic funds in the latest week.

While domestic mutual funds are reversing the negative month of March, foreign equity mutual funds continue to receive net positive inflows. This past week investor added another $1.15 billion according to ICI bringing the cumulative total from 2007 to$168 billion:

Taxable bond funds remain the favourite destination for US mutual fund investors. They squirreled away another $3.3 billion this past week to bring the total for April to $13 billion and the cumulative since 2007 to $786 billion.

Municipal Bond Fund Flows
Municipal bond funds continue to see net outflows with an additional $615 million leaving the sector according to Lipper FMI. Data from ICI is a bit harsher showing an additional net withdrawal of $1.15 billion exiting the sector in the recent week. The surprising development is that while the municipal bond market itself has now stabilized and recovered to the November 2010 levels, retail investors are still reeling from the volatility and choosing to sell. Part of that may be due to a delayed or shell-shocked reaction but a more negative interpretation would be that money is moving out of arguably the least riskiest asset class and into equities, one of the riskiest, as retail investors re-balance their portfolios to chase the recent performance from stocks.

As you may know if you’ve been reading the past missives, I’ve been adamantly bullish on municipal bonds based on the extreme reaction from retail investors and the lack of any serious fundamental reasons for panic. The iShares S&P National AMT-Free Municipal Bond Fund ETF (MUB) closed the week at $101.89, a 5.8% increase from its recent low.

ETFs &Leveraged ETF Fund Flows
The major equity ETFs had inflows this week: iShares 2000 ETF (IWM) had inflows of $1.6 billion. The PowerShares QQQ ETF (QQQ) received an additional $1 billion and the SPDR S&P 500 ETF (SPY) $500 million. So while retail investors seriously curtailed additional equity investments, traders and institutions continued to add to equity ETFs.

According to data estimates from TrimTabs, US ETF inflows for the month of April (to 27th) are $4.5 billion. Even more interesting is the focus of retail investors activity in leveraged ETFs. According to TrimTabs, leveraged long US equity ETFs have seen inflows of 0.8% relative to assets, compared to 1.1% last week. In contrast, short leveraged equity ETFs saw net withdrawals of 1.8% relative to assets, compared to 4.9% redemptions in the prior week. TrimTabs follows leveraged ETF fund flows as one of the most important tells of market sentiment. Charles Biderman added, “We believe this activity is actually bearish for equities, because our research shows that leveraged ETF flows are a particularly strong contrary indicator.”

Gold Sentiment
Before adding further, I wanted to review my recent commentary on gold (see Gold Approaching Extremes) where I wrote:

Two points to watch are an accelerating gain in price which would provide a short term parabolic rally, pushing price away from trend as well as luring in even more traders and ultimately exhausting the bullish camp; and the repercussions of serious correction in silver (which is in an unsustainable parabolic pattern).

We haven’t seen silver correct significantly but we did see the increase in the price of gold accelerate this week and gain about $55 in the span of the 3 days after I wrote the above. That sharp rally has provided a small parabolic pattern on the gold charts and it has stretched price to the upside relative to its medium term trend.

Equities in the meantime are lagging the commodity itself. As I observed previously this may explain the rather odd nonchalant behavior we are seeing from Rydex traders who are usually very quick to jump on any rally. But within equities, the more speculative junior mining stocks are leading the more mature and larger gold mining stocks. The Market Vectors Junior Gold Miners ETF (GDXJ) is outperforming if we compare it to the Market Vectors Gold Miners ETF (GDX). So we are seeing traders and investors favoring risk in this sector – something which is a contrarian negative signal.

The bullish percent index for the gold sector is now back up at 80%. The last time it was at this height was late last year. In response gold paused from October to December 2010. As well, the 4 week average of the Bloomberg sentiment survey for gold is now at 86%, a multi-year high signalling an extremely lopsided optimism for the precious metal.

Finally, the put call ratio (10 day MA) for the SPDR Gold Shares ETF (GLD) is now down to 0.52 which suggests that once again, option traders are making a one way bullish bet on gold. In the past, this has usually coincided with tops as you can see in the chart below comparing the put call ratio with the ETF price:

US Dollar
Retail investors remain extremely pessimistic on the US dollar. The short term (5 day) moving average of the Daily Sentiment Index for the dollar is scraping the bottom of the chart at 6%. Meanwhile, from the spring Barron’s Big Money Poll (see above), institutional managers are surprisingly bullish on the US dollar, expecting it to strengthen against both the Yen and the Euro. It seems that all the negative news is baked in the US dollar right now. As well, it is well to remember that bottoms are forged during pessimistic sentiment and negative newspaper headlines. It would be difficult to find a more negative headline than the recent Standard and Poor’s downgrade of the US credit rating and the ongoing budget wrangling in the US government regarding the debt ceiling and the budget deficit.

Options Sentiment
There was little movement in options markets this week. The CBOE (equity only) put call ratio declined slightly to 0.59 from its closing at 0.62 last week. In either case, this put call ratio has not provided us with a definitive edge in some time and continues to muddle within a range.

Likewise the (equity only) ISE Sentiment index was unchanged from its close last week at 198. The current level is far from the January highs of 267 and is not providing us with much to go on right now.

The S&P 100 index put call ratio which had been providing us with a clear and negative signal for the equity market is starting to ameliorate, even as the equity market clears its congestion area, reaching for new breakout highs. The 10 day OEX put call ratio declined from last week’s 1.98 to 1.72 and the open interest put call ratio also fell (from 1.72 to 1.65). While I was expecting a much more significant retracement based on these put call ratios, it would seem that the recent sideways market has been enough to eliminate the worst of it.

Another possible scenario is that the OEX put call ratio is an accurate harbinger of lower prices but just as in 1999 and 2007 there is a delayed reaction. In 1999 the OEX put call ratio (and the open interest put call ratio) reached extremes in December 1999 but the market itself didn’t top out until April and September 2000 (in a double top). Then in 2007, the OEX put call ratio once again provided the same signal in February 2007 and the equity market topped out in July and October 2007 (another double top). So we may be seeing a top in 5-6 months.