Here is the final sentiment overview for the year. Hope you have a happy and profitable new year!
The AAII weekly survey from retail investors in the US is a little less optimistic this week compared to last week’s euphoric one. There were 51.6% bulls and 20.1% bears providing us with a bull ratio of 72% (compared to 79% from last week). This doesn’t negate the message of this indicator at all.
In fact, if we step back and look at the smoothed average (4 week simple average) the bull ratio is the highest it has been since December 2005 and previous to that August 2005. Both those instances were better times to sit out the market than to be long. In August 2005 the S&P 500 corrected from a top of 1245 to a low of 1175. And in December 2005 it managed to creep higher until April 2006 but it was all lost quickly as the market corrected. By August 2006 the S&P 500 index was basically where it was one back in December of 2005.
Similar to the AAII survey, the newsletter editors are also slightly less bullish this week: 55.6% down from 58.8%. The bears are little changed at 20%. The bull bear ratio is still around 2.8:1 whereas we’d prefer to see it just a tad higher at 3:1.
The reason for this is that the bearish camp is not as deserted as in the previous two cycle tops. Last year at this time, the II bears were down to 16% and in April 2010 they were whittled down to just 17%. But they are still just a tad too many (20%) for the bull ratio or the bull bear ratio to reach the extremes of those two previous instances.
Market Vane’s Bullish Consensus
This sentiment indicator measures CTA’s and other advisories recommendations for the equity market, similar to ChartCraft’s Investors Intelligence survey of newsletter editors. It closed the year at 62% which, while not seemingly high is in fact the highest level of bullishness since mid 2007.
From 2003 to 2007 Market Vane’s sentiment indicator reached as high at 75%. But because this indicator can ‘reset’ its range for several years, it is more useful to compare it to its more recent performance. Right now this sentiment indicator is outside of its ‘normal’ recent range as well as above both the tops it reached in late December 2009/January 2010 and April 2010 – both times when the S&P 500 topped out.
NAAIM Survey of Active Managers
This sentiment survey indicating the long/short position of portfolios from active managers declined slightly from its extreme bullishness a week ago. The median fell from 92.5% to 85% and the average fell slightly from 82% to 80%
The variability of survey responses continued to shrink. There have only been 3 other instances when the survey respondents have had less disagreement. So we are once again seeing managers bullish, albeit slightly less so, but all in all, very much in agreement with each other regarding their long exposures to the market.
Another survey of advisors, investment and brokerage analysts and CTAs is the Consensus sentiment indicator. The current reading is 68% which is high but not as high as the April 2010 top (75%) or even the more recent November 2010 highs. This indicator however has a two week lag because of the time it takes to aggregate and analyse the data so we may see it rise quickly in a few weeks. But right now it is not at a true extreme even if it is showing a preponderance of optimists.
Hedge Fund Sentiment
The December TrimTabs/BarclayHedge survey of hedge fund managers is showing a resurgence of bullishness towards the equity market: 46.2% bulls and 18.7% bears. Last month the bears outnumbered the bulls: 30.5% bullish and 39% bearish. The current level of optimism is the best since April 2010. In contrast, they are overall bearish on bonds this month: 14% bullish and 53% bearish.
Turning to the US dollar, hedge funds are as bullish on the greenback as they’ve been since May 2010: 39% bullish and 13% bearish. This is slightly lower than in May (49% bullish and 15% bearish) when the dollar index was at a peak.
The majority of the 92 managers surveyed also believe that the precious metals sector is the most overbought going into the new eyar.
Mutual Fund Flows
According to TrimTabs, investors have switched from shunning equities and cherishing bonds to the reverse. In December equity mutual funds and ETFs received a total inflow of $24.1 billion – the largest inflow since April 2010. Meanwhile, bond funds and ETFs have hemorrhaged $16.3 billion.
TrimTAbs also suggests that money flows in leveraged ETFs suggests that the rally can continue because long leveraged ETFs redeemed 2% of their assets last week while short leveraged ETFs redeemed just 0.2% of their assets. You can view a recent interview with Charles Biderman on Bloomberg TV.
According to data from ICI, mutual funds in the US continue to see a similar pattern we’ve been observing for some time. For the week ended December 21st, 2010 domestic funds had a trickle of inflow ($335 million) while foreign and emerging markets received much more ($3.6 billion).
Bond funds continued to see withdrawals, although investors cut back in their selling of taxable bond funds while continuing the selling of municipal tax-exempted bond funds. Total bond funds saw $4.4 billion withdrawals. Of that $3.5 billion was attributed to municipal bond funds and only $837 million to taxable bond funds.
The big news continues to be the mass exodus of retail investors from the once unquestionably solid municipal bond market. According to Lipper FMI, for the week ended December 29th, 2010 investors withdrew $1.42 billion – this marked the 7th consecutive weekly outflow and the worst since November 2008 at the height of the last bear market.
Based on the Bank of America Merrill Lynch Municipal Master index, the municipal bond market has lost just 4.5% in the last quarter of 2010. That combined with the ultra-bearish analysis of Meredith Whitney on the widely viewed TV program “60 Minutes”, apparently has been enough to cause a panicky stampede out of this asset class. To me, this is akin to the infamous ‘magazine cover indicator’. It just happens to be in TV form.
The week prior to this they withdrew $2.9 billion and before that $2.6 billion. Since mid-November 2010 when the recent trouble started, investors have withdrawn a total of $13.44 billion from the once rock solid municipal bond market.
As I’ve mentioned before, this sudden and emotional response is a contrarian signal. I continue to believe that the municipal bond market is a buy as is the general bond market. I expect both markets to do well once people realize that the world is indeed not ending.
Finally, mutual funds’ cash reserves remain relatively low and holding at 3.7% where they have been for the past 12 months.
Similar to the multiple surveys we looked at above, option traders also reduced their enthusiasm for stocks this week. The 10 day moving average of the equity only CBOE put call ratio rose to 0.55 from 0.50 and the 10 day moving average of the ISEE Sentiment index fell from 243 to 211 or from 0.41 to 0.47.
Similarly we saw the OEX ‘smart money’ option traders reduce their bearishness as the 10 day moving average of the OEX put/call ratio rose to 1.80 from 1.60 last week. Nevertheless, just as with the other option market data, it is continuing to point to an elevated risk level.