Here is this week’s summary of sentiment data:
Starting off with the weekly AAII survey of retail investor sentiment, we find them yet again very bullish. Last week the bulls were just shy of the majority but this week at 53%, most expect stock prices to be higher 6 months from now. The bears meanwhile are little changed from last week at 24.4%. This is only the 4th week so far this year that we’ve seen the AAII bulls take 50% or more of the survey.
As a result, the AAII bull ratio (the percentage of bulls relative to those who are either bullish or bearish) is yet again scraping the top of the sentiment ceiling at 70%:
The last time the bull ratio was this high was in late October – a bit too early because the S&P 500 index formed a short term top in the first week of November. Nevertheless, as you can see from the chart showing the bull ratio from 2007 onwards, this level of enthusiasm is both rare and historically indicative of a top.
The survey of newsletter editors is confirming this bullish outlook. For the fourth straight week, the majority of the II survey were optimists. This week the bulls numbered 56.2% exactly the same as in mid-November. And the bears this week are slightly more than that week: 21.3%.
The bull ratio of the Investors Intelligence survey is hovering around 70% and the bull bear ratio is at 2.64:1 very close to the 3:1 that usually signals a top:
As well, if we look at the survey another way, by taking the differential between the bulls and bears, we see once again that the mood of the average newsletter editor is just too optimistic for their own good:
It is at 35% for the moment but when the difference moves to 40% or higher we see at least a correction and in the case of October 2007, a bear market:
NAAIM Survey of Manager Sentiment
After spiking to 97% long exposure in mid-November the active managers polled by the NAAIM weekly survey have reined in their bullishness slightly. The current median exposure is 82.5% which is still elevated and well above the long term average of 54%. The mean exposure has fallen slightly more: from a recent high of 76.42% in early October to just 63.1% this week. To put that in perspective, the long term average for the mean exposure is 50%. So even though the S&P 500 index is higher now, these managers have reduced their long portfolio exposure slightly instead of piling on the way we’d expect them to from a contrarian perspective.
We looked at the Rydex traders’ attitude towards gold this week as one of the few sentiment indicators at an extreme. While these myopic traders have indeed rushed into gold, they have similarly rushed into pretty much every equity sector with equal fervor.
A great way to keep track of the Rydex sentiment is to look at the sector funds because these usually have higher betas than the wider market index funds like the S&P 500 or Dow or Nasdaq. And because they have higher volatility, they tend to attract crowds seeking hot returns. Right now, 76% of the Rydex sector funds have assets above their 50 day moving average. This is comparable to early August 2010 and late April 2010. Historically, this has been a very good indicator of too much speculative froth and an ensuing correction of various degrees.
Mutual Fund Flows
According to ICI for the first week of December, equity mutual funds had an outflow of $1.8 billion dollars. This is in line with the weekly pattern we’ve seen for several months. Foreign equity meanwhile enjoyed inflows of $1.85 billion. Bond funds had small inflows ($489 million) after 2 weeks of uncharacteristic and large outflows.
According to Lipper, junk bonds once again saw net positive inflows of $1.04 billion for the week ended Wednesday. This offset the outflows of $1.15 billion from last week. That and the previous two weeks were the only net weekly outflows since July 2010 as retail investors had rushed into bond funds and high yield bond funds specifically.
As well, Lipper reports inflows of $660 million for all equity funds (domestic and foreign) excluding ETFs. An inflow of $1.6 billion for taxable bond funds after a small outflow last week. Municipal bonds continue to see outflows this week ($518 million) but they have fallen dramatically from the last two weeks of November.
Focusing on the affluent investor, a new survey from Spectrem Group covering investors who own assets between $100,000 to $1 million shows that this sub-group is preferring cash to equities. Over the next month, 20% are planning on investing in equities while 40% are planning on holding cash. And just 17% are allocating money to bonds. Affluent investors have been very reticent to wade back into risky assets after the 2008 bear market and are sticking to their cautious outlook even with the recent gains in the stock market.
Hedge Fund Flows & Sentiment
According to the latest TrimTabs/BarclayHedge survey of hedge fund flows, the month of October saw $16 billion of new inflows. Things are humming along in the hedge fund sector as this was the fourth consecutive positive inflow and the largest since November 2009. This shouldn’t be surprising given the almost zero cost of leverage for hedge funds. Borrow at almost zero, invest in any risky assets, charge 2/20 and profit.
The TrimTabs/BarclayHedge survey of hedge fund sentiment showed a large uptick in bearish sentiment towards bonds. At 49%, the November bearishness towards fixed income approached the level that we last saw in September (49.5%). But the sentiment was even more lopsided in June 2010 with 59.2% bearish.
US dollar pessimism also increased with 49% of the hedge fund managers surveyed being bearish on the greenback. This is the mirror opposite of May 2010 when 48.9% were bullish on the dollar.
Initial Public Offerings
IPOs are a very good long term measure of market sentiment. We went through a very dry spell during and after the recent bear market. But recently filings, pricings and performance have definitely picked up. Especially if we focus on the Chinese related IPOs.
For example, Youku.com’s recent one day pop of 161% reminded me of the Google IPO if not the heyday of the IPO frenzy during the 1999 and 2000 tech bubble. Navigating these waters is treacherous as many Chinese companies are nothing but shells with a story. The recent crash of Rino (RINO) and China Education Alliance (CEU) are probably not going to be the last.
So far, IPOs from Asia have dominated with 65% of the deals and 66% of the proceeds. The risky Chinese and Nasdaq IPOs are not the only place where the action is. The Big Board is looking at the largest backlog of IPOs in four years.
While the flurry of Chinese IPOs definitely points to an excessive speculative streak in the IPO market, generally speaking we are seeing a return to normal.
I’m a bit surprised to see a muted reaction from corporate insiders. In the past, this has been a relatively reliable (albeit sometimes slow) indicator of market tops. For example, in both January of and April of this year there was a spike in selling relative to buying that marked those market tops. But right now we are seeing a neutral reading:
I already discussed the option market this week so I’ll refer you to those posts:
- CBOE Put Call Ratio: Everyone’s Betting On The Bull
- Retail Option Traders Go On Call Buying Frenzy (Again)
The rest of the week continued to witness an unadulterated orgy of call buying with the ISE closing on Friday with 343 calls purchased to open a trade relative to 100 puts. We are fast running out of superlatives as that is close to the record for the highest daily call put ratio at that option exchange.
Not surprisingly, the record was set on April 15th 2010 at 348. And the 10 day moving average of the ISE Sentiment index closed at 246.5 just a sliver away from the past record set on April 16th, 2010 (247.2). And before that, the next highest level was July 16th 2007 at 244.80.
The CBOE put call ratio also continued to press further into extreme bullish levels since last I wrote about it. In fact, the equity only put call ratio was consistently below 0.50 for the whole trading week! Starting at 0.49 on Monday and ending at 0.42 on Friday it trended continuously more bullish as the week wore on.
The 10 day moving average of the CBOE put call ratio ended the week at 0.504, the lowest since late April – just as the S&P 500 index stumbled 16.4% into the low of early July 2010. Here is a chart comparing the CBOE equity only put call ratio with the S&P 100 index: