Here is this week’s comprehensive summary of sentiment data:
The majority of those polled by the AAII returned to the bullish camp: 51.5% think the S&P 500 index will be higher in 6 months while about 27% believe it will be lower. Last week we had seen a respite when the bullish camp fell to just 42% – this was the first time since early December 2010 that the bulls gave up the majority. For the previous 7 consecutive weeks there had been at least 50% bulls.
Also noteworthy is the change in the AAII asset allocation survey. According to the latest results, the portion of their portfolio allocated to equities ticked up 2% points to 64%. This is the highest level since 12 months ago but still a little lower than the levels that corresponded to the 2007 market top.
The survey of newsletter editors this week had 52% bulls and 22% bears providing a bull ratio of 70.5%. Over the past few weeks we’ve seen a slight decline in the overall relative bullishness shown from this indicator. The highest level was measured in mid January when there were 3 bulls for every bear. Now we have 2.4 optimists for every 1 pessimist.
NAAIM Survey of Manager Sentiment
This week the average professional money manager surveyed increased their exposure to the market to the highest since late April 2010. The average exposure increased to 82.13% and the median decreased slightly to 91.5%. This is the 13th week in a row that the median exposure to the market has been at or above 80%.
TrimTabs/BarclayHedge Survey of Hedge Fund Managers
The latest survey of hedge fund managers sees them toning down their optimism towards equities from last month. Of those surveyed, 37.4% are now bullish on US equities (compared to 46.2% the previous month), this is the second highest level of bullishness recorded. And 26.4% are bearish, compared to just 18.7% the previous month – which happened to be the lowest reading in the survey’s short history.
While hedge fund managers are optimistic towards equities, managers continue to be bearish on bonds with 47.2% expecting them to be lower and only 14.9% believe they are a buy. This is the third month in a row that this survey has shown a bearish bias towards bonds. Managers were ambivalent towards the US dollar with appx. an equal portion being bulls and bears towards the greenback.
Leveraged Short ETFs
According to Charles Biderman of TrimTabs, the best fund flows timing indicator is the retail investors flows into leveraged short ETFs. Based on a “massive” flow of money into short leveraged ETFs coupled with an outflow from long leveraged ETFs, TrimTabs is now fully 100% bullish on the US equity market. TrimTabs follows several ETF fund flows but I looked at one and came to the opposite conclusion: Rydex Leveraged ETF Ratio: A Market Top In Sight.
Frankly, I’m a bit shocked to hear this because TrimTabs was skeptical of the market’s rise throughout the cyclical bull market and even fanned the flames of conspiracy theories by suggesting that the Federal Reserve was buying equities (or futures) to push the market higher because he couldn’t figure out how the market was rising. And now, he turns 100% bullish?
Fund Flows Data
US equity mutual funds received $2.3 billion of inflows with the majority ($1.7 billion) destined for the domestic market and the remaining $600 million to the international markets, according to Lipper FMI. This is the 9th consecutive week that money flows into domestic US funds have flipped to the positive. And it is the 7th consecutive week where domestic funds have received more money than foreign funds.
As you probably know if you’ve kept up to date with mutual flow data, investors were favoring international markets much more and only recently have turned to the US market with some serious attention. Nevertheless, this is the 23rd week of consecutive inflows for the international focused mutual funds.
Taxable income funds have returned to the normal pattern of inflows that we have seen for the majority of the time in the past few years. This past week there was an inflow of $3.6 billion bringing the total for the young year to almost $16 billion.
According to ICI, the latest weekly fund flows data shows a similar picture with $3.25 billion entering domestic US funds and $1.9 billion added to foreign mutual funds. Taxable bond funds received $3.5 billion while municipal bond funds saw withdrawals of $2.7 billion – about half of the previous week’s outflow.
The irrational selling in muniland continues. According to Barclay Capital, tax-free bonds are trading at lower prices than taxable bonds backed by the same entity.
According to Lipper FMI, municipal bond funds still had outflows but at $1 billion, it was the lowest for the past 8 weeks. Criticism of Meredith Whitney’s hyperbolic warnings of defaults. As several other analysts have pointed out, Whitney’s warning is very light on specifics. For a fantastic deconstruction of the apocalyptic warning and why it is wrong, see this, courtesy of Wasmer, Schroeder & Company.
While we are still seeing outlfows from retail investors, any semblance of stability in the municipal bond market is provided for now by non-traditional and opportunistic buyers such as hedge funds and other institutional investors. It also helped that January was a very light month in terms of issuance (supply) with only $12.2 billion new bonds sold – the least since 2000. If we return to a normal and healthy level of supply, it remains to be seen if the market will be able to absorb it without the normal level of demand provided by retail investors or if the muni market will crack again under that stress.
Another data point signaling that we have witnessed a selling climax is the survey of municipal dealers by Municipal Market Data, which showed 0% bulls for several weeks. The latest survey shows 38% bullish. Advisors meanwhile are trying their best to calm down retail investors who are panicking over Whitney’s comments on “60 Minutes”. Of course, Whitney has cachet because of her previous call on US banks but as I pointed out before, those who make bold predictions which turn out to be true tend to have horribly bad future track records.
Emerging Market Flows
According to EPFR, after becoming the darling of asset allocators and gaining $95 billion of inflows last year, emerging market positions are being unwound. Last week more than $7 billion was pulled from emerging markets as concerns of higher inflation and economic overheating took center stage. This massive retreat is the 3rd highest weekly outflow after record outflows in March 2007 and January 2008. Investors seem to be rotating back into developed markets as US, Europe and Japan received equity fund inflows of $6.6bn – being the 5th consecutive week of positive money flows. For more, see this article at FT.
The US has recovered from its cycle lows (late last year) but it has not really been able to put up a good rally. In fact, the US dollar index is petering out and heading back down. Public sentiment isn’t very helpful as it is milquetoast. One thing that is noteworthy is that the US dollar index volatility is hitting record highs (as measured by standard deviation):
Option traders this week tended to move away from the extremely bullish postures that have come to define them for the past few weeks. The ISE Sentiment index (equity only 10 day moving average) was left unchanged at 204 while the shorter 5 day average ticked up to 220 (from 188 last Friday).
The traditional measure of option sentiment, the (10 day average) equity only CBOE put call ratio moved up slightly to 0.58 (from 0.55 last week). Turning to the OEX put call ratio (the so called ‘smart money’ indicator in the options market) we continued to see a preponderance of put buying but there was a little bit less this week taking the short term put call ratio down to 1.50 – the open interest ratio remains elevated at 1.23.