To my Canadian and US readers, have a great weekend celebrating your country’s founding! And remember to use a designated driver.

Sentiment Surveys
Retail investor sentiment according to the weekly AAII improved slightly along with the recovering stock market. The bullish grew slightly to 38.3% (from 37.5% last week) and the bears fell from 36% to 30% bringing the bull ratio up to 56%. This is normal behavior but of course, as contrarians, we’d prefer to see a bit more skepticism to cement the floor.

Investors Intelligence
Almost 40% of the stock market newsletter writers monitored by ChartCraft for their Advisor Sentiment index expect further price appreciation while 27% were still bearish. It would seem from the price action that the correction is over however at least from this indicator the recent retracement was a very shallow one compared to previous bull market corrections:

The four week moving average of the Investors Intelligence bull ratio (bullish % divided by the decideds) is still tracking downwards without having reached levels that have previously matched market bottoms. This is mainly because unlike other major corrections the number of bears didn’t rise above 28%. Normally we see 35-40% bears at intermediate market lows.

NAAIM Survey of Manager Sentiment
As with the other sentiment indicators, the NAAIM survey of manager sentiment increased slightly this week rising to 33% exposure from 29% a week earlier. Digging into the data a bit more we find that the most bearish response to the survey is a surprising 140% short position against the market. This suggests that there are still some who are skeptical and a few who are very much not believing in the bounce higher.

Hulbert Stock Newsletter Sentiment
The general Hulbert Stock Newsletter Sentiment index didn’t plumb the depths that we’d like to see for important cycle lows. When the average market timing newsletter editor suggests to their readers to short the market, at market bottom is close at hand. But this time they trimmed their portfolios to a 20% long allocation.

The more volatile Hulbert Nasdaq Newsletter Sentiment Index (HNNSI) did fall into negative territory. But even so, compared to itself, it failed to reach an extremely pessimistic level (at only -20.3%). Historically we have seen -60 to -65% as extreme.

Consumer Confidence
The Conference Board Consumer Confidence index fell to a 7 month low as the weak housing market, slow job recovery and the high prices of gas took their toll. I’m sure the European sovereign debt crisis which has brought the Greece riots to the front pages of newspapers and TV news hasn’t helped either.

The Confidence headline index decreased to 58.5, down from its recent peak in February of 72. The largest drop originated from the Expectations sub-index where it dropped to its lowest reading for the past 9 months.

Mutual Fund Money Flows
According to data from ICI, retail investors continue to exit equity mutual funds. This past week ended Wednesday, US domestic funds lost $4.2 billion. For the month of June investors have redeemed almost $18 billion from equity funds making it the worst month since May 2010:

Strangely enough, investors seem to be avoiding fixed income which used to be their favorite asset class. This week they’ve only added $1.48 billion when they would normally add between three to four times that. Likewise, they’ve also become neutral towards foreign equity funds, having added almost nothing for the whole month. From a contrarian perspective this is good news as the last time retail investors were avoiding foreign stocks was August 2010, just before the next leg higher.

The panic selling of junk bonds seems to have ebbed. The prior week saw $3.43 billion exit this risky asset class as concerns over Greece’s default took center stage. That was the largest weekly outflow since 1992 and was itself a ratcheting up of selling from the previous week when $1.62 billion was redeemed. This past week was still negative but more subdued with only $321 million flowing out of that asset class. This suggests that investors are slowly returning to accepting risk once again.

Municipal bond funds enjoyed their 7th consecutive positive weekly money flows with an additional $403 million entering the sector according to ICI data. Lipper FMI confirms the positive inflow but suggests $163 million in inflows.

Fixed Income
Sentiment towards US Treasury bonds is close to reaching a bullish extreme. The bond timers monitored by the Hulbert Bond Sentiment Index reached a recent peak of 46.1% (and have since declined to 35%). This means that the average bond timer was recently suggesting that their clients be long the bond market with 46% of their portfolio. That has historically corresponded with tops in long dated Treasuries.

As well, Consensus bullish percent for Treasury bonds hit 56%. That’s down 2% from last week and very close to the levels that have marked major tops (70% area). So we do have some significant reasons to be leery of bonds here.

Corporate Insider Transactions
According to data from Reuters, corporate insider transactions are supportive of higher stock market prices:

There is usually a lag of at least 6-8 weeks built into this indicator. But given that leeway, it is a fairly good guide to inflection points. The most recent warning which every student of the market should have seen from a mile away was the large selling spike in late April which corresponded to the market top.

Option Sentiment
The ISE sentiment index averaged 178 calls for every 100 puts over the past week. At this point it is difficult to glean an edge from it, except from the earlier signal when the 5 day moving average fell to the lowest since last summer’s correction. For the chart, see the sentiment overview for June 17th.

The CBOE equity only put call ratio reflects the shift towards calls as traders attempt to take advantage of the bounce higher. The 10 day moving average has fallen to 0.64 from its recent high of 0.89 on June 17th. The normalized put call ratio has also collapsed utterly:

As well, the sudden shift in the Nasdaq 100 ETF (QQQ) also grabbed my attention. The traders, like the S&P 100 index option traders, are best taken at face value. And right now they have shifted to trading quite a few calls relative to puts:

The only other market approaching this level of gloom and doom is China’s equity market. Here’s a more detailed look at the Sentix (short term) crude oil sentiment index:

The last time that we saw such an extremely negative sentiment from this indicator was during the 2008 crash in oil prices. Back then I wrote about the dangers of being long the crude oil market as it approached clear parabolic status and called it a ‘bubble’.

It is notable that the decline in price we have seen since early May does not even being to approach the catastrophic declines that occurred in 2008. But even so, sentiment is now as negative as it was back then. From a contrarian perspective, this suggests that it is smart to fade the IEA’s recently announced sales.

Apart from a directional bet, another way to play this is to position a trade that takes advantage of the narrowing of the gap between the Nymex and Brent crude oil markets. As of Monday the spread is a little over $13 but earlier this month it ballooned to $23 a barrel. Usually Brent trades at a small discount to West Texas Intermediate Crude and over the next few weeks, the lopsided sentiment suggests we’ll see an eventual return to that.

Sentiment Surveys
The stock market rebound that arrived earlier in the week was enough to put some wind in the sails of the retail US investor. The AAII weekly sentiment survey showed an increase in the bullish camp to 37.5% and a retreat in bearishness to just 35.7%. So once again, we have more bulls than bears – something we hadn’t seen since late April.

In the end, the short term average of the AAII bull ratio is little changed and still at contrarian bullish levels:

I would have preferred to see sentiment stubbornly bearish in the face of the recent price gains. But keep in mind that the survey was taken on Wednesday – the best day of the week. We’ll have to wait for next week’s survey results to see how they react to the price declines that occurred in the last half of this week.

As well, the Farrell Sentiment Index (not shown) which takes into account half of the ‘neutral’ respondents has provided a buy signal by rising from below 0.50 and crossing higher.

Investors Intelligence
Investors Intelligence Advisory Sentiment index, ChartCraft’s measure of newsletter sentiment, showed a smidgen more bearishness this week. The bulls increased to 37.6% (from 37%) and the bears to 28% (from 26%). Overall, very little was changed in the general state of this indicator. We’ve seen a decline but not one that is significant enough to match previous correction lows.

NAAIM Survey of Manager Sentiment
The headline numbers for this survey increased slightly from last week. The average market exposure inched higher to 29% from 26%. But what I want to bring to your attention more than that is the difference between the most bullish responders to the poll and the most bearish. This ‘Polarity’ is now declining rapidly after reaching a new record in late April:

When this indicator is high it reflects the fact that those who are most bullish are over-the-top excited about the market and maximum long while those who were the most bearish weren’t really bearish at all. And when it is scraping the bottom of the chart, it means that the portion of survey responders who were the most bearish were extremely bearish while even the most bullish responders were just mildly long.

Consensus
The Consensus bullish percentage continues to decline as it has for the past few months. This week it fell to 46% (from 50% last week). Ideally I’d like to see it fall to 30% or lower because that is the area that has tended to match up with major market lows.

Hulbert Stock Newsletter Sentiment
This measure of newsletter sentiment shows the average market timing stock market newsletter recommending less than 20% long exposure. That is a decline of more than 45% percentage points.

While this is where the market found its footing previously in mid-March, it is still a shallow correction within a wider historical context. Usually significant lows are made when the HSNSI falls to negative (meaning a suggested short exposure to the market).

TSP Sentiment
The TSP survey this week fell to an even more bearish posture with 59% expecting lower prices and just 31% expecting higher ones. The bull ratio declined to 34%, the lowest since August 2010.

The 4 week average of the TSP bull ratio (shown above) has also declined to levels that would suggest a significant low is in order.

Bear Market or Correction?
Mark Hulbert provides further insight by looking at the pattern of various sentiment surveys 52 trading days after a peak to see if we are entering a new bear market instead of a correction. The results are inconclusive.

Mutual Fund Flows
The selling that we observed last week intensified across most asset classes. According to Lipper FMI data, US domestic mutual funds saw net redemptions of $1.2 billion (about half compared to last week). ICI data in contrast showed an increase in redemptions reaching $6.8 billion (on top of the $5.4 billion from last week). Even with one week remaining to be accounted for, we have already easily surpassed the total outflows in May.

So far this month more than $13.4 million has exited domestic US funds. At this trend, June will be the worst month for domestic equity flows since August 2010. Since the start of 2007 investors have withdrawn more than $338 billion from the US stock market – a new record thank to this week’s data.

Even fixed income which had been the favorite among retail investors for a long time saw a decrease of inflows. Based on data from ICI, taxable bond funds has less than half the flows compared to last week ($2.4 billion). According to Lipper FMI, bond funds received even less, $707 million for the week. Even so, the cumulative asset flows into bond funds since 2007 reached a new record ($816 billion).

The corporate high yield sector which is a useful weather vane of risk appetites and market sentiment lost $2.9 billion for the week ended Wednesday, according to Lipper FMI. That is the largest outflow going back to 1992. The second largest weekly outflow was $2.55 billion in August 2003 – this was the beginning of the end of the 2000 bear market.

You’ll no doubt recall from last week’s Sentiment Overview that junk bonds saw heavy outflows then. In fact all of June has been a terrible month for junk bonds. But this week really takes the cake.

Municipal funds on the other hand had another week of inflows, albeit a very modest one at $129 million based on Lipper FMI data. Almost all of that was to the high yield municipal funds sector. According to ICI this is the 6th consecutive positive inflow for municipal bond funds. Recent commentary from Cumberland Advisors:

The overall improvement in municipal finances has also contributed to improvement in the market. State and local governments (in total) are heading toward the sixth quarter in a row of RISING tax receipts. Also, problems in the pension area, which have gotten widespread press coverage, have started to be addressed. We expect this trend to continue.
The selling has abated in the municipal fund arena. Though most weeks have seen outflows, they are much smaller, and there were actually inflows a couple of weeks. Part of this is just the normal abatement of pressures, but it is also the recognition, even among retail investors, that things had really reached a point where the market was severely oversold.

ETF Fund Flows
Turning over to the ETF universe, we see the same trends reflected in the data. According to Lipper FMI fund flow data, junk bond ETFs lost $484.2 million for the week ended Wednesday – a new record. Two major ETFs accounted for the bulk of the outflow: iShares iBoxx High Yield Corporate Bond (HYG) lost $269 million and the SPDR Barclays High Yield Bond (JNK) suffered $245.3 million in redemptions.

The largest equity ETF, the SPDR S&P 500 (SPY), also had the largest net outflow for the week ($1.7 billion) followed by the SPDR Select Sector Financial (XLF) which had $378 million in net outflows. Even foreign equities and emerging markets were not immune. The iShares MSCI EAFE ETF (EFA) lost $748.8 million. About the only sector to see positive flows was municipal ETFs but even then the numbers were very small.

Gold Sentiment
With the exception of the decrease in the Rydex Precious Metals fund assets, there is little to warrant our real interest in gold (for chart see last week’s Sentiment Overview). For now the market seems mired in cross currents that will probably leave it chopping within a range or declining mildly. The various sentiment surveys are not providing an edge with the consensus being mildly bearish.

Option Sentiment
The ISE Sentiment index was almost unchanged this week with the 10 day moving average of the equity only call put ratio closing at 165 this week. The 5 day moving average meanwhile has started to climb back up from its recent low:

The CBOE options market has also quickly climbed aboard the bullish bandwagon with the first 3 days of the week delivering put call ratios less than 0.60 – this after last week where we had 3 back to back days of put call ratios above 1.

The institutional option traders meanwhile are reducing their short bias. The S&P 100 index (OEX) put call ratio has fallen again this week. The open interest put call ratio is down to the lowest levels since early April 2011.

The Nasdaq 100 ETF (QQQQ) put call ratio is once again curling down. This option market, like the OEX one, is taken at face value so this decline suggest that we are about to see another attempt to bottom – perhaps at a slightly lower price point than the previous one:

The US will release half of the total IEA sum with Europe releasing 18 million and Asian countries another 12 million. The news was enough to send crude oil down sharply. This is an indication of the current pessimistic outlook holding sway over this market. If anyone had actually stopped to do a back-of-the-envelope calculation they would have noticed that this amounts to very little indeed.

Consider that the global consumption is running at 89 million barrels a day. So 60 million will cover it for a bit more than 16 hours. According to the US Energy Information Administration, the average daily consumption of crude oil in the US was 18.7 million barrels in 2009 and 19.15 million in 2010. So the US portion represents about a day and a half’s worth of oil.

Finally, although the big number in the news is 30 million, there is no guarantee that that amount will be supplied. The process in the past has been to invite bids from private companies to sell the crude. In 2005, after the disruption caused by Hurricane Katrina, the US government made available 30 million through a similar ‘notice of sale’. They received 14 bids, of which only 5 were accepted and in the end, resulted in total sale of only 11 million barrels of oil.

What the crude oil market may be reacting to is the implied threat from the IEA to become a more active player to massage prices lower. No doubt today’s IEA announcement was a not so subtle hint to Saudi Arabia.

The real story is whether Saudi Arabia will in fact turn on the spigot as they have threatened to do after the disastrous OPEC meeting earlier this month. On one side stands Saudi Arabia and on the other Iran and Venezuela. If the US friendly Saudis do in fact increase supply and push down demand (with a little help from the unwinding of the long-only futures bets put on by the hedge funds) then we will see something akin to QE3. Something else complicating this is the difference in the quality of the marginal oil production that Saudi Arabia can add. The loss of the Libyan oil is exaggerated by the fact that it was some of the lightest and sweetest crude available while the Saudi Arabian oil is sour and requires much more refining.

Realistically though I’m not sure how an international agency whose purpose is to stockpile crude oil in the event of a catastrophic supply disruption will now take on the role of a supplier. The two roles are diametrically opposed. There is no doubt that the global economy needs lower oil prices but whether the IEA’s machinations will provide that is up for debate.

In the middle of all this there may be a trading opportunity if we look at this from a contrarian view point. First, some of the best buying opportunities camouflage themselves amidst a thicket of negative headlines. Second, price has already been going down for some time, falling more than 19% from a top in April. Like equity prices, crude oil reached its 200 day moving average.

And third, sentiment towards crude oil is running low. By the end of the week we’ll have some new numbers to work with but the latest shows a significant deterioration in bullishness. We’re now seeing about as much negative sentiment as we did last summer.

Finally, the Commitment of Traders reports show that the Commercials are rapidly reducing their gargantuan net short position – built up during the first quarter of this year. And both Large and Small Speculators are rapidly moving to reduce their large long positions.

While as a consumer and as a global citizen I wish for lower oil prices, the current market cross currents and sentiment suggest that we’re about to see the opposite.

Most analysts are similarly suggesting that future prices will be higher. Here’s a brief rundown from Reuters:

GOLDMAN SACHS
We estimate that a 60 million barrel release by the end of July has the potential to reduce our 3-month Brent crude oil price target by $10-12 a barrel, to $105-107 a barrel.
We would expect the release to have less of an impact on prices further out the curve, as the oil would be absorbed to meet current demand.
Net, we would expect that the potential impact on Brent crude oil prices in 2012 to be closer to $5-7 a barrel on average

JP MORGAN
It is important to recognize that the IEA countries will “offer” or “make the petroleum available” to theSource: IEA Oil Market Report market. That does not necessarily mean that the oil offered will be taken up… For political expediency, the IEA is unlikely to want to be seen. There is an implicit, but not yet apparent” release price”.

PRESTIGE ECONOMICS
While this is price bearish for crude oil today and in the immediate term, these measures are being implemented with the intent to stave off significantly higher prices in the near- and medium-term. The fact that the IEA had to go to these lengths in the second year of an expanding business cycle says something very bullish about crude oil prices in the medium-and long-term. The global economy is up against a wall in terms of receiving additional oil supplies to meet demand. Additional demand or supply disruption would have a massively bullish impact on prices. After all, releasing emergency inventories is a last resort.

CAPITAL ECONOMICS
Our view has always been that oil prices would fall anyway given the deteriorating prospects for demand and the likelihood that some OPEC members, led by Saudi, would raise output regardless of the formal ceilings. Overall, the result on Thursday was fresh falls in equities and commodity prices, and in safe haven government bond yields, with the dollar regaining ground. We expect more of the same over the rest of the year, consistent with our view that the US S&P 500 will hit 1200; Brent crude will be back below $90pb.

As well, Gregor.us is equally bullish:

Releases of oil from inventory are counterintuitively bullish, not bearish, for prices. While oil prices no doubt will be rocked for several months now, releases such as these only highlight the fundamental problem at hand: structurally restrained supply. For example, the OECD could have turned to non-OPEC producers within their sphere of influence and asked them to produce more. But Non-OPEC producers, accounting for 57% of total global supply, have no spare capacity. The oil market is going to figure this out more quickly than most imagine.

As is Jim Ritterbusch of Ritterbusch & Associates. He believes oil will be back above $100 by the end of the summer.

It would be truly poetic if copper were topping here, as sentiment suggests. After all, with the advent of not one but two physical copper ETF’s the ducks are about to get fed.

With hindsight we now know that copper did in fact peak in February. Since then it has meandered lower, participating in the general commodity retracement. The introduction of the two ETFs (iShares Copper Trust ETF and the JP Morgan Physical Copper Shares ETF) were fantastic sentiment signals.

To be fair, before I pat myself too furiously on the back, I had been negative on copper since late 2010 when I wrote “Copper Loses its PhD Moniker“. But the commodity totally ignored my brilliant analysis and kept going up.

Now, after some months of tepid correction, copper sentiment is down to levels that have usually marked significant lows. The Bloomberg Sentiment which I pointed to previously is not yet down to abysmal levels. Its 4 week moving average has fallen from a spike of 76% to 62% (chart can be seen here). But an aggregate measure of copper sentiment which takes into account several surveys, including the Bloomberg one, from the always sharp mind of Jason Goepfert (of SentimenTrader) is showing an exhaustion of the bullishness that was prevalent back in Febuary:

Source: SentimenTrader.com

What’s surprising is the relative shallowness of the current correction and how in spite of it being so milquetoast, it has somehow managed to depress most people involved in this commodity. From peak to trough copper retraced 15.6%. Silver during the same time fell 31%. Copper is a rather volatile commodity and it isn’t unusual to see large retracements. For example, last summer it corrected almost 24%.

Commitment of Traders
We have corroborating data from the CFTC issued Commitment of Traders reports. The latest data shows a complete reversal of positions between the major market participants. Whereas in early 2011 Commercials – miners like Freeport-McMoRan (FCX) – were short and Small Speculators (retail futures traders) long, the current market is characterized by the opposite.

Of course, the fundamental issues that troubled me haven’t really been resolved. Copper is still being punted about as a plaything for the large speculators decoupling it from its historical normative demand/supply forces. But the sentiment and Commitment of Traders reports both suggest that the correction here has been enough to flush out the weak hands and prepare copper for another leg up.

Almost the same can be said for crude oil by the way.

When the CESI is positive it means that the released data have been better than the expectations. In other words, economists have not ratcheted up their optimism enough to match the data coming in. When CESI is negative, it means that actual results have been worse than expectations.

Just a few months ago in March, when most were worrying about a coming weakness (or a double-dip recession) the surprises were very positive. Back then, the average economist, unlike the sentiment surveys, was quite pessimistic. At least relative to the actual results.

Now, we’re seeing the opposite happen with CESI dropping to negative levels not seen since the bear market lows:

In the above chart you can compare the Citigroup Economic Surprise Index for global data and the Citigroup Economic Surprise Index for the US. By far, the US CESI is showing a deeper decline. The European CESI (not shown) is actually still quite a ways from a similar extreme low suggesting that their markets have not yet seen a washout of selling.

As a reader pointed out last week, this indicator is now suggesting that we are at an important inflection point. However, because troughs correspond well to stock market lows, this indicator is not interpreted through a contrarian lense.

That is to say, when economists are too ‘pessimistic’, markets top and when they are ‘optimistic’ markets bottom. The linked to article incorrectly states that “economists are now overly pessimistic”. If this were the case, we’d be seeing positive CESI (as real data would exceed their low expectations). In fact, we’re seeing the opposite: economists that are so ‘optimistic’ that the actual results have been worse than their average consensus.

The important take away point here is when economic data is absolutely horrendous – as it is getting to be now – important lows are close at hand. When everything is sunshine and lollipops, you better run and find a good bombshelter!

The S&P 500 index is now down to important support levels supported first by the simple 200 day moving average and second by the March 2011 lows (blue line). The long term moving average is not by itself not really significant nor magical. But it is psychologically important since it is foremost in traders’ minds. Losing the support of the long term trend makes many fearful of further losses and usually results in a self-fulfilling prophecy.

As we’ve already seen, the bulk of the various sentiment data featured in the weekly overview is supportive (in a contrarian way) of higher stock prices. Also, Rydex traders who are atrocious when it comes to market timing have thrown in the towel. The fact that this coincides with the support levels above is a good sign.

As I’ve mentioned previously, multiple indicators are suggesting that the correction is about to end; with one important proviso. That being that we are still enjoying a bull market. It is never easy to find market tops since they are marked by a slow degradation of momentum rather than the fearful spikes of selling we see in important bottoms. However, aside from the weakness in the cumulative advance decline lines, I haven’t seen any strong indications that the bull market has ended.

The cumulative AD line is a bit worrying. However, we’ve seen it act weak in previous bull market corrections. The most pronounced accompanied the April 2010 top.

Another technical indicator of breadth is the S&P 500′s Hi-Low index which is a ratio of the new 52-week highs relative to the new 52-week lows. As with other indicators, it is suggesting that stock prices have been pushed down enough to be attractive (within a bull market environment):

Among world indexes, the two with the most bearish sentiment are Japan (Nikkei) and China (CSI). Among commodities, crude oil is the least loved.

With the Greek sovereign debt crisis coming to a head, it isn’t surprising to see the European banking sector get clobbered in the sentiment readings:

Of course, from a contrarian perspective this means that we’ve seen or are about to see an important low. Remember that market bottoms are made during times of pessimism and negative news. By the time the crisis is resolved, the rebound will be well underway.

The relative Banking index is close to reaching the 2009 bear market lows and finding support during the gloom and doom related to the Greek debt crisis.

Sentiment Surveys
Even though the S&P 500 index was slightly lower, the weekly survey of retail US investors was more optimistic this week than last. This is surprising since we usually see sentiment reflect market moves. Those expecting stock prices to be higher in 6 months rose to 29% (from 24.4%) while the bears decreased to 43% from 48%. The change was small but enough to push the bull ratio up to 40% from 34%.

This is 43% the average bull ratio and therefore still a very low level of optimism overall. The four week moving average of the bull ratio was basically unchanged and the lowest since late July 2010. For the chart, see last week’s sentiment overview.

Investors Intelligence
The story remains the same with this indicator. Just as last week optimism is waning but there are still far too many newsletters who believe the current market weakness is merely a ‘correction’. While the bulls have receded from a peak of 57% in April to 37% this week, the bears are still too few in number at 26% to provide a meaningful signal.

Sentiment & Market Tops
Mark Hulbert wrote an interesting article earlier in the week in Barron’s: “Is the Bull Market Over?“. He looks at the behavior of the sentiment surveys mentioned here (Investors Intelligence, Hulbert Newsletter Sentiment, and AAII) and compares their pattern at major market tops.

His conclusion is that these sentiment surveys are coincident indicators. Based on this he suggests several ways that we can check to see if a recent top (such as the one we’ve just had) is the end of a bull market. One way to tell is if the peak in sentiment and the peak in stock market prices are separated by more than a few months. In such a case a major top is unlikely.

Another way to confirm a major top is to check if sentiment has reached historically extreme levels. If instead sentiment indicators have peaked at lower levels then a major market top is unlikely. Based on these two key variables, Hulbert concludes that we can’t rule out that the May top will mark a ceiling for prices for some time.

TSP Sentiment
It has been a while since we checked in on this retail investor sentiment survey. The most recent one conducted yesterday shows the majority (56%) expecting lower prices. Only 33% of those surveyed are bullish. The bull ratio stands at 37% which is contrarian bullish. At the mid-March lows the bull ratio was at this same level.

Consensus
Much like other sentiment indicators, the Consensus Bullish Sentiment Index is declining from a recent peak above 75% in February 2011. The extremes for Consensus are 75% (bullish) and 25% bearish. The current level of 50% is smack-dab in the middle of those two extremes and as such doesn’t provide us with a real edge.

NAAIM Survey of Manager Sentiment
We’ve been watching this sentiment survey drop since it peaked at 97% in February of this year. With this week’s result it is finally approaching extreme levels that have corresponded to important market lows in the past.

The median NAAIM market exposure this week was just 25% while the average was slightly higher at 26%:

Keep in mind that usually sentiment measures don’t usually get as pessimistic during bull markets as they do during bear market cycles. The current NAAIM (median) is exactly where last year’s summer retracement ended. It fell to 27.5% in June and again to 25% in July.

Merrill Lynch Survey of Hedge Fund Managers
The most recent monthly survey conducted between June 3rd and June 9th covered 282 managers who oversee a total of $828 billion of assets. The results show that overall investors are reducing their risk profile and increasing allocations to cash and bonds.

Not surprisingly, the EU’s sovereign debt crisis continues to be at the forefront of hedge fund manager’s worries. All other concerns are distant to the European debt concerns: 43% of fund managers believe it to be the biggest ‘tail risk’ up from 36% in May.

The net percentage overweight equities fell from 41% in May to just 27% in June. Europe lead the exodus with the percentage of investors underweight European markets increasing to 15% from 1% in May. The proportion of investors overweight commodities fell to a net 6% from 12% in May.

Paring equity and commodity exposure, hedge fund managers moved assets to cash which surged to an 18% overweight (from just 6% in May). This is the largest overweight since June 2010. The shift also saw bonds, an asset class which has been in disfavor for a long time, gain some new interest. Fixed income underweight moved from 58% in April, 44% in May to 35% in June.

According to Michael Hartnett, chief global equity strategist at Merrill Lynch Global Research, “Investor capitulation from risk assets is not yet visible despite higher cash levels and defensive rotation. Fears on global growth will need to rise further before hopes for QE3 can begin to be priced in.”

Here’s a chart showing the net allocation to US equities:

Here’s a chart showing the net allocation to European equities:

TrimTabs/BarclayHedge Survey
The TrimTabs/BarclayHedge Survey for May shows that while the stock market weakened, the institutional managers polled slightly increased their bullishness compared to April (30.1% from 23.5%) while those expecting weaker prices fell from 34.1% to 28.8%. Add to that a whopping 34% who are increasing their leverage and the fact that margin debt is the highest since February 2008 and we have a very aggressive outlook from this indicator.

This is quite a contrast to the survey’s results one year ago when we saw just 18% bulls and 52.3% bears. The stubborn level of bullishness then is a bit worrying. But before we get too carried away, it is important to remember that there is considerable lag built into this indicator so the data we are seeing is already stale.

Their skepticism towards bonds continue to persist. The last time the bulls outnumbered the bears in fixed income (10 year US Treasuries) was in August 2010. But hedge fund managers were once again bullish on the US dollar (30.6% compared to 27.7% in April).

The firm of TrimTabs itself is taking a cautious stance and reducing its market exposure to zero from 50% exposure. TrimTabs’ reasoning is that the end of QE2 to spell the end of the ‘propping up of the market’. While certainly understandable, this is information that is all too well known and already priced into the market. They go on to write to their clients that the “S&P 500 is down 6.8% from its interim closing high on April 29, and we expect market action to get even uglier this summer.” Their terrible track record makes it tempting to fade them here.

Corporate Insiders
After increasing the rate of their selling last week, corporate insiders made an abrupt about turn. Data for the week ended last Friday shows that they reduced their selling (-32%) and increased their buying (-33%). According to data compiled by Vickers Weekly Insider Report the fact that they curtailed their selling implies that they believe that their stock prices will rise soon. Had they instead continued selling at the same or faster pace, that would have been an ominous sign for the market. The ratio is now at its most bullish since September 2010. For more see: Insiders turn back from the brink.

Insider data from Thomson Reuters shows a similar pattern:

Mutual Fund Flows
According to data from Lipper FMI for the week ended June 15th, domestic mutual funds had a massive net withdrawal of $2.4 billion. This is the largest weekly net outflow since September 2010. ICI reports an even larger amount leaving US domestic mutual funds: $5.5 billion. This is one of the largest weekly outflows I’ve seen in some time! At this rate we will easily surpass the net redemption total from last month. In the first two weeks there have been $6.5 billion withdrawn from domestic equity funds compared to $8.6 billion in all of May.

Below is a chart showing the 4 week moving average of all equity fund flows (based on data from Lipper FMI). The current data is the worst showing since September 2010.

Lipper FMI reports that fixed income received another $1.8 billion. This is the 26th consecutive weekly inflow for the asset class but it is a bit light compared to previous weeks. But the corporate high yield sector which actually is correlated with the equity market saw a net withdrawals of $1.3 billion for the week. This is the largest weekly redemption since May 2010 (when the sector lost $1.7 billion). According to the Merrill Lynch High Yield Master II index, junk bonds were priced at 102.2 yielding 7.31% – 565 basis points above Treasury bills.

ICI reports fixed income mutual funds receiving inflows of $5.1 billion for the week ended June 15th. Fixed income is on such a tear that the cumulative total since 2007 has now reached a new high ($813 billion). Meanwhile, the cumulative total for domestic equity mutual funds has sunk close to its previous low (-$331 billion).

Municipal bonds suffered yet another negative week of flows as $175 million left the sector. So we return to the negative after just one week of positive flows had broken the 29 consecutive negative streak before it. The outflow is surprising since the municipal bond market itself is continuing to perform well with its 11th consecutive positive weekly return. In contrast, ICI reports net inflows of almost $300 million for this sector.

IPO Market
The IPO market continues to expand with new offerings hitting exchanges on a daily basis. One of the more prominent technology IPOs this week was Pandora Media (P) which priced at $16 and enjoyed a one day pop but since then has deflated precipitously. This has been the fate of several IPOS, including the high profile LinkedIn (LNKD) which has lost about 30% so far. So far this year we’ve had 138 filings and 74 pricings, slightly ahead of 2010. While the renewed interest and activity in the IPO market is indicative of a more risk tolerant investor, it is difficult to disparage it with the monicker of a bubble, especially if we compare it to the 1999 extravaganza.

Gold Sentiment
Among the multiple indicators that I monitor for gold, there really isn’t a clear consensus. Most of the noteworthy measures of gold sentiment are lukewarm or still too optimistic. The one glaring exception is the behavior of the Rydex traders.

The Rydex Precious Metal sector mutual fund has seen a major exodus pushing its total assets down to $134.6 million. Historically, this much loathing has been a reliable indicator of an important low for gold:

Grey Beards
Every once in a while it pays to check in with the ‘grey beards’ – this is the name I give to experienced and successful professional investors. Among this select group is Steve Leuthold of the Leuthold Group. He shared his insight in an interview with Bloomberg TV yesterday.

Leuthold mentions that the sell-off was not a surprise to him since he expected the highs for the year to arrive in the first half. He believes that the peak in April will remain for the rest of 2011. Leuthold’s models are showing a median valuation for the S&P 500 bellwether index.

More interesting he says “This isn’t any time to sell”. He expects a significant rally point because the market has gone too far too fast and it is oversold. Even so he only has a 60% equity allocation in his mutual funds and in his partnership 35% (before he removes hedges). Leuthold prefers investing outside the US, especially Asia.

Option Sentiment
The 10 day moving average of the equity only ISE call put ratio fell to 163 as of today’s close. That is the lowest level since August 2010. The 5 day moving average fell to just 146 which is the lowest since early July, when the S&P 500 index found support after last summer’s correction:

This week the CBOE equity only put call ratio had 3 back to back days above 1 taking the 10 day average to 0.895. To find a higher level we’d have to go back the dark days of February 2009. As I mentioned earlier in the week, we haven’t seen this much fear in option traders since the bear market bottom. The normalized put call ratio jumped to close the week at 1.45 – a multi-year high.

The OEX option indicator that I’ve mentioned over and over again has started to recede. The ample signals that it provided through the volume and the open interest put call ratios were legitimate. From March 2011 it had telegraphed a very serious warning signal. Those that heeded it were protected from the market weakness that followed.

Now it seems these same institutional ‘smart money’ traders are backing away slowly from the massive short position that they have built up. The open interest put call ratio is lethargically dropping and the volume put call ratio has fallen from its recent peak at 2.12 to just 1.55 – the lowest since February 2011.

Then again in early May I pointed once more to the same indicator and suggested that we were about to see have another market top. This time the market reached a peak immediately.

In the light of those two prescient warnings, the market weakness we’ve experienced is understandable. The S&P 500 index is down more than 7.5% from its peak and the Nasdaq Composite has retraced more than 9%.

So what is this accurate indicator telling us now?

Instead of showing you the raw Rydex Leveraged ETF ratio as before, I thought we’d instead look at the 100 day stochastic of the ratio. This simply takes the ratio and converts it into a range bound indicator with a maximum of 100 and a minimum of 0.

As you can see from the chart, the indicator is now almost back down to its lower extremes. Earlier this week the lowest it reached was 24. That is still a bit away from the lows it reached last summer but it is enough to warrant lightening any short positions.

Other measures of Rydex trading activity show even more positive bias. For example, if we look at the various Rydex sector mutual funds, we see that less than 10% of them have current assets higher than their 50 day moving average. This means that Rydex traders are exiting almost all sectors en masse. Historically when we’ve seen this level of reluctance to hold Rydex sector funds, a major low wasn’t too far away.

Another measure of Rydex activity focuses on the flow of funds into bullish mutual funds, both leveraged and non-leveraged funds. The pattern in this indicator is also bullish because Rydex traders are seriously paring their long exposure to equities.

By itself this or any other indicator is not to be trusted. But taken in concert with the other signs that we’ve seeing, including the option trading activity, this important contrarian indicator based on Rydex trading activity suggest that the market is about to find support at these levels.