Here is this week’s comprehensive look at sentiment data for the markets:
Starting with the various sentiment surveys, the AAII weekly retail investor survey walked back slightly from last week. Those expecting the market to be higher 6 months from now declined from 53% to 50.2% and those expecting the market to fall also declined from 24.4% to 22.6%. As a result, the AAII bull ratio fell from an extreme 70% to 65%.
Since we’ve had a very sustained and high level of bullishness from the AAII survey, I wanted to show you the 4 week moving average of the bull ratio. It is now at 66.6%:
The chart shows that this short term smoothing average is now at levels that we hadn’t seen for 5 years. The previous time that the 4 week moving average was higher was in late December 2005. And prior to that, August 2005 and earlier, in January 2005. Both August and January 2005 resulted in corrections. But the December 2005 level didn’t stop the S&P 500 index. It managed to muddle through from January 2006 to May 2006 and only then corrected in the summer.
AAII Asset Allocation
According to the asset allocation survey from the AAII, the average retail investor is still heavily invested in equities. The current equity allocation is 62%, the largest since Jan 2010. Perhaps not surprising in a zero interest rate environment, they are holding very little cash at 16% allocation – the lowest since early 2000. And the rest is invested in bonds (22%).
Wall St. Strategists Allocation
The Wall Street strategists version of the above survey shows a similar exposure. The average strategist heading a major US investment bank is holding 59% of their model portfolio in equities (slightly below average), 31% in bonds and just 7% in cash. The bond allocation continues to be elevated relative to long term historic levels but it is well off the peak in early 2009 at appx. 40%.
The Investors Intelligence weekly survey of newsletter editors from ChartCraft is little changed from last week. At 56.8% bulls and 20.5% bears, the bull ratio remains where it was last week, approximately 73%. This is high but just shy of the extremes that we have seen previously mark major market tops. For example, the October 2007 top corresponded to a bull ratio of 76% and the April 2010 top to a bull ratio of 75%.
Hulbert Newsletter Sentiment
The survey of newsletter editors compiled by Mark Hulbert is showing a slightly more bullish tint. The Hulbert Nasdaq Newsletter Sentiment index which measures the posture of the newsletters that attempt to time the Nasdaq stock market is now once again at extremes. The current reading is 73%, slightly lower than the level at the start of November (80%). And again, in April 2010 the HNNSI was at 80%. The previous time it saw these levels as in September 2003 (78.6%).
NAAIM Survey of Active Managers
This week’s NAAIM survey provided us with a final glimpse that active managers are finally responding positively to the higher stock market prices. Before this week they were reluctant to increase their long exposure but now their average portfolio long exposure is 75% and their median is 90%. We have a very limited number of years for this survey but so far, the weekly results have been lower than this 86% of the time. So this can be defined as extreme bullishness:
The increased level of long exposure and bullishness also comes coupled with an equally dangerous level of conviction. The recent survey answers have a very low dispersion rate suggesting that most managers agree with one another about the expectation of further gains.
Crowd Sentiment Poll
It was just a few weeks ago that we looked at the Ned Davis Crowd Sentiment Poll. Since it is an amalgamation of various sentiment indicators and since many of them are either at extremes or approaching them, the Crowd Sentiment poll is also indicating a bullish extreme. At the current level of 69%, it is well above the 61.5% “line in the sand”. In the previous link you can see a long term history of the indicator showing how it has reliably coincided with previous major market tops.
The Market Vane survey tracks various advisors and CTA’s recommendations. Currently its bullish percent is 59%. While this may not seem high at first, you have to consider that Market Vane, like many other sentiment indicators, tends to reset into certain zones for specific periods of time. Therefore, comparing the current level to the most recent data shows it to be demonstrating excessive bullishness. The previous two instances that it was at similar levels was in April and January 2010.
Merrill Lynch Survey of Fund Managers
The recent survey of fund managers from Bank of America Merrill Lynch provides us with a window into the mindset of the institutional money manager. As usual, most managers (60%) are not expecting the Fed to move on interest rates but an almost equal portion of them do see higher inflation on the horizon.
Managers have shifted from Europe to the US as their favored destination. Europe went from a net 15% in November overweight to a net 4% underweight in December. Meanwhile a net 16% of managers are now overweight the US. While most managers point to Japan as being the most undervalued region, they are not yet putting money where their mouth is.
There has also been an important shift in their sector allocation. The energy sector has dethroned technology after it enjoyed 11 consecutive months of being the most favored sector. Now a net 38% of managers are overweight energy (compared to 24% in November). This is an interesting development because we looked at this sector a few days ago due to its favorite status for the Rydex traders: Energy Services Sector Overbought. The total Rydex Energy Services fund assets have now surpassed $190 million.
Advisor Confidence Index
This survey is a monthly poll of financial advisors and tracks their bullishness towards the stock market as well as the economy. We looked at the results of October last month: Financial Advisor Sentiment Rises To 3 Year High. The ACI for November inched up slightly from 110.63 to 111.75.
As with the other survey, this shows the disconnect between advisors and their clients (or the average retail investor). While advisor confidence in the economy and the market has smartly recovered to its level from 3 years ago, prior to the credit crisis, the average Jane and Joe is far from feeling normal again.
To contrast the ACI, consider the Conference Board Consumer Confidence index which continues to be mired in the 50’s with the latest results at 54.10. This is far from its levels in the summer of 2007 at 113.
Since November, coprorate insiders have sold $19 billion dollars worth of their company’s stock. That total is the highest since early 2007, months before the credit crisis buffeted financial markets creating one of the worst bear markets in history. According to Vickers Weekly Insider Report, which relies on data from Argus Research, the selling reached a crescendo last week with a reported 7:1 sales to buy ratio. While it is normal to see insiders sell much more than they purchase, at this point, we are definitely seeing an inflection point.
While this extreme level of selling by players in the know is troubling, there are two caveats to observe. First, according to Prof. Seyhoun, a specialist in corporate insider data, the hisotrical pattern of sales to purchases has trended higher and the ‘normal’ level is now not too far below the level observed for last week (6.5:1). The second caveat is that much of the selling can be reasonably be assumed to be motivated by a desire to avoid possible capital gains tax increases.
We know as of today that President Obama signed the new tax law which allows for the continuation of the Bush tax cuts. Doubt is removed and once again, the capital gains tax is once again capped at 15% – the lowest since 1941 – and will be in effect for at least two more years. It is possible that some of the recent selling was a way to reduce the perceived political risk before the dust settled.
Mutual Fund Flows
According to ICI, US equity mutual funds have hemorrhaged $4.4 billion in the first two weeks of December. Foreign mutual funds have, in contrast, attracted $3 billion of inflows in the same time period. And probably most interesting, bond funds are set to see their first monthly outflow in two years – if the recent weekly pattern continues. So far, investors have withdrawn $1.2 billion from bond funds.
According to fund flow estimates from TrimTabs, US domestic mutual funds have inflows of $2.7 billion from December 1st to 13th. If the trend continues, December will be the first net positive inflow for US domestic equity funds since April 2010. TrimTabs estimates that bond funds lost $2.3 billion in the same time period.
As the chart below (from a recent Credit Suisse research note) shows, money is now flowing into equity funds. Some of this money is coming from bond funds and some of it is probably new money entering the stock market:
Source: Credit Suisse
With the stock market having provided recent gains and with sentiment at very positive and excited levels, this would be the simplest explanation. We’ve been watching the incredible flows into bond funds for many months now wondering when this tsunami would crest. This explanation makes the most sense but keep in mind that usually the retail investor and crowds in general are wrong at the inflection points. Especially when combined with a background of extremely positive sentiment.
Recent option data suggests that there is no let up in the recent penchant for bullish call buying. Both the ISE and CBOE put call ratio are at extreme levels. And both retail option traders and the pros are continuing to favor call options which provide them with potential upside to the stock market.
The ISE data is especially curious as it is setting new records. The equity only data for the ISE call put ratio reached a historic 354 this Thursday. This means that retail option traders were going long 354 call options on stocks for every 100 purchases of put options on stocks. I’m trying to determine if there is any possibility that large blocks of Citigroup options traded on the ISE might have skewed the call put ratio. If I find something, I’ll share it with you as always. In the meantime, I don’t want to simply deny the numbers just because they are awe inspiring.
The 10 day moving average of the equity only ISE Sentiment ratio finished the week at 258.4 – slightly higher than last week (247). The 5 day moving average, representing one week’s worth of trading activity, hit a new record of 281 on Thursday and then settled a little lower on Friday (260).
The (equity only) CBOE put call ratio fell slightly from 0.50 to 0.48 this week:
What is really fascinating at this junction is that when we analyse the option sentiment, both retail and professional option traders are positioning themselves for further stock market gains. Historically when we’ve seen this patten and this level of conviction, they have been both wrong.