Here is this week’s sentiment overview for the recent trading week:
The weekly survey of retail investor sentiment by the AAII fell to 52% bullish and 24% bearish resulting in a bull ratio of 69%. While optimism hasn’t increased in step with the stock market, this is the 7th consecutive week that at least half of the survey respondents have expected higher stock prices going forward.
This has pushed the smoothed bull ratio (4 week average) up to 74%, the highest since February 2004:
At the end of the year I commented that we just weren’t seeing the kind of pessimism that I’d prefer to see from the Investors Intelligence survey to mark an important inflection point. This week we’ve finally managed to overcome that hurdle.
According to ChartCraft, 57.3% of stock market newsletters are bullish and only 19% are bearish. That (finally) gives us a 3:1 bull bear ratio and it pushes the bull ratio itself to 75% – a level which we last saw in April 2010. Also, we haven’t seen this few pessimists since the same time.
So while sentiment can certainly get even more lopsided, we’ve finally arrived at a truly extreme point – at least according to this one indicator.
NAAIM Survey of Manager Sentiment
This week the NAAIM survey, which polls active money managers in the US, continues to hover at high levels of bullishness with the median at 85% long exposure to the market (see chart below). The mean or average ticked down slightly from 78.5% to 77%.
In this survey managers can be 200% long to 200% short the market. What we have seen historically so far is a range between 0% and 100% long. This week marks the 10th week that they have been long with at least 80% exposure to the stock market.
But the most intriguing aspect of this survey remains the fact that we are seeing the respondents to this poll agree with each other regarding the bullish outlook to an extend that we haven’t seen since late 2006 and early 2007.
Surprisingly, this previous instance of bullish consensus coupled with a high degree of confidence among the money managers did not trip up the market. The S&P 500 index was able to tack on another 13% gain before topping out on October 2007.
The latest Thomson Reuters/University of Michigan survey of consumer sentiment shows a slight decrease in the consumer expectations. The results fell to 72.7 from 74.5 in December 2010. The consensus expected to actually see a slight increase to 75.5 for January (from a survey conducted by Bloomberg).
The current conditions index also fell, from 85.3% to 79.8%. The general outlook from the US consumer continues to be dim with very anemic numbers showing a reluctance to increase spending and a pessimistic outlook for the future.
Keep in mind that this is the preliminary release of the consumer sentiment data from this survey. There will be a secondary and final one for January later in the month.
In case you missed it, I provided some detailed analysis of the gold sector a few days ago: Gold Sentiment More Pessimistic While Price Close To Highs. Here is another sentiment metric, the weekly survey conducted by Bloomberg on gold sentiment:
The bullish sentiment fell from a high of 82% in December 2010 to 40% in early January 2011. The most current data shows a small rebound in optimism but it is still subdued at 58% bullishness. The four week average, shown in the chart above, is at 66%. While the overall picture is not pessimistic, you have to remember that we’ve only see a shallow retracement which has left the precious metal within reach of its all time high.
Mutual Fund Flows
According to ICI the first week of January saw inflows of $2.4 billion into foreign equity mutual funds while $4 billion was withdrawn from US equity funds. After exiting bond funds in December and ending 99 consecutive weeks of inflow, there are some signs of a return to fixed income. In the first week of January 2011, $546 million inflows for the asset class.
Municipal bond funds continue to be a source of drama. Investors started to withdraw from them in November 2010 ($7.7 billion) and intensified the selling in December 2010 ($12.6 billion). In the first week of January they are continuing to sell with another $2.1 billion leaving the sector.
According to Lipper FMI, $3.2 billion entered the US equity mutual fund market for the week ended Wednesday January 12th 2011. Another $1.3 billion went into foreign equities. In contrast to ICI, Lipper reports that for this past week US investors returned to municipal bond funds with an inflow of $1.5 billion, breaking the 8 consecutive weeks of outflow.
While the figures do suggest a slight change in the recent exodus from equities, there are still a variety of anecdotal evidence that investors continue to be reluctant to embrace stocks again.
The options market continues to be marked by a predominantly bullish outlook. According to the ISE, the 10 day moving average of the equity only call put ratio increased to 267. This is the same elevated level we saw in mid-December 2010:
The preponderance of call buying is continuing to be especially concentrated in the financial sector and a handful of banking stocks.
The CBOE put call ratio (equity only) showed a similar deterioration, falling below 0.50 again as it did in mid-December 2010. The option sentiment indicator ended the week at 0.475. The frenzy of call buying was especially lopsided on Friday with the put/call ratio at an extreme one day low of 0.37.
Here is a chart comparing the 10 day moving average of the equity only CBOE put call ratio and the S&P 100 index: