Sentiment Overview: Week Of February 11th, 2011

Here are the developments for sentiment data this week:

Sentiment Surveys
Starting off with the weekly AAII survey of retail investors, there was little change this week. Those who believe the stock market will be higher 6 months from now were down slightly to 49.4% (from last week’s 51.5%) and the pessimists were up slightly to 23.7% (from last week’s 21.6%). The bull ratio is at 65% and in a holding pattern after spiking to almost 80% in late December 2010.

Investors Intelligence
Newsletter editors tracked by ChartCraft are also relatively unmoved in their convictions this week. The bulls were slightly higher at 53.4% (compared to 52.7% last week) and the bears were also slightly hgiher at 23.3% (compared to 22% last week). The bull ratio is at 70% which is down slightly from the peak of 75% in mid January.

NAAIM Survey of Managers
This week the active managers surveyed in this poll went all in. The median exposure to the market was 96.5% – the highest since mid-November 2010 and before that, May 2007. This much bullishness is rather rare, having only occurred less than 5% of the time so far.

The average exposure was 86%. We’ve only seen a higher level of long (average) exposure to the market about 4% of the time. While the bullish side of the room is getting crowded, there is also close agreement among the managers to be this long. That is, by looking at the averages, we aren’t missing any real pockets of pessimism. There really is a clear consensus here to be really long the market:

Here’s another way to see just how scarce ursine sightings are right now. In this survey, respondents can pick any position along a continuum of 200% short to 200% long the market. So it is common to see the most bearish position at 100% short or even more so. If we then track the maximum bearish position in the survey we can measure just how extreme the skepticism is out there. According to contrarian analysis, we should see the market bottom when the maximum position is very high. That is exactly what we see:

The above chart shows the 4 week moving average of the most bearish posture in the survey. When the market makes a low, we have tended to see consecutive weeks of very short exposure. This chart also reveals something that you would miss if you were to just look at the survey’s headline results. To see what I mean, take a look at what happened in early December 2010. While the median exposure in the headline NAAIM numbers was high (82%) this shows us that the maximum short exposure was very high (-181%) so there were some people who were heavily betting against a market rise.

I’m going to pay a bit more attention to this alternative way of looking at the NAAIM numbers to see if it can provide us with a better indicator. For now, it remains to be seen whether the recent lack of maximum bearishness will translate into a market top as it did previously.

Rydex Advisors Confidence Index
The gulf between consumer confidence and the financial advisor confidence continues to grow. For January, the Rydex Advisors Confidence Index reached 123 which is the highest since February 2007. Note that this survey measures financial advisor sentiment towards the US economy and the stock market. For a second month in a row, all components (current outlook, future outlook, and stock market outlook) increased across the line.

Sentix
Here is a brief update for the week from Sentix:

The sentix total index for Euroland climbed to a 3 and a half year high with a plus of 6.1 points. The index was last this high in September 2007. Europe is continuing to catch up. Carried by current assessment (+7.25 points) and a rise in economic expectations (+5 points) the leading indicators are continuing on last month’s positive trend.

The total index for the USA has also improved, although expectational values have not moved forward. The Emerging Markets are beginning to wobble. A glance at the economic expectations for Asia ex Japan and Latin America shows us a cooling-down in these regions.

Daily Sentiment Index
According to Larry McMillan, the DSI may be providing a sell signal as it moves to an extreme and then falls below 90%. Earlier this week on Tuesday, the DSI for the S&P 500 index peaked at 93% bullish. It then fell to 90% suggesting that sentiment is waning as it did in early November 2010:

Usually, the “trigger” for a sell signal is when it falls back below 90. It registered exactly 90 today, so a down day tomorrow would probably be enough of a catalyst.

The last signal was a sell signal on Nov. 8, 2010 (after DSI peaked at 94 two days prior). As you know that was the only semblance of a correction that we’ve seen in the Standard & Poor’s 500 Index since last summer. $SPX fell about 55 points (peak to trough) in less than two weeks, so it wasn’t a big reaction — more of a chance for the market to catch its breadth.

Gold Sentiment
According to Mark Hulbert, the group of stock market newsletters that specialize in the gold market did something rather rare last week. On average, they suggested to their clients to be neutral to the gold market. Well, to be exact, the Hulbert Gold Stock Newsletter Sentiment index fell to -1.4%. If I’m remembering correctly, the last time the HGNSI was negative was in early July 2009 ( at -10%) and that marked a significant low for gold.

This data point is a small addition to the many that I covered over the past few weeks suggesting that gold was about to end its correction. My current outlook is a bit more wary as gold and gold stocks are acting weaker than I expected. I’m not seeing the same vigor and follow through that I was hoping considering the many technical and sentiment reasons for an inflection point. Maybe the headwind is negative seasonality or maybe something else. Whatever the case, I’m more cautious.

Small Business Optimism
According to the latest NFIB monthly survey of small businesses in the US, we are seeing a continued recovery – although from a very deep pit. The NFIB Optimism index was 94.1 for January, still below 100. Small businesses are starting to hire and they are also beginning to get some price traction.

Retail Trader Activity
According to a recent report by TD Ameritrade, their clients made an average of 452,000 client trades per day in January 2011. That was an increase of 7% from January 2010 and a 25% increase from December 2010. This is another small sign that retail traders are slowly dipping their toes back in the stock market waters.

Mutual Fund Flows
According to ICI, for the week ended this Wednesday (February 2nd to February 9th) there were inflows of $1.4 billion into US equity funds. The flow into international funds slowed to a trickle ($346 million) no doubt a consequence of the tumultuous days in Egypt and the drooping emerging market indexes. Taxable bond funds only attracted an additional $1.75 billion – that is the lowest weekly amount since December 2010.

Junk Bonds
Investor appetite for junk bonds continues with $1.29 billion of net inflows for the past week – according to Lipper FMI. This is the 10th week of inflows and it brings the total to $6.7 billion of net inflows since the start of December 2010. The mad dash into these risky but high yielding bonds has pushed the Merrill Lynch High Yield Master II Index up to 103.86 cents on the dollar and the yields down below 7% (to be exact, 6.90%). This is the lowest level going back 6 years and it is very close to the all time low of 6.863% seen in December 2004.

We’re also seeing some really terrible deals going through. The low yield environment, thanks to the Fed’s monetary stimulus, is providing fertile ground for a truly bizarre credit market. Investors are starving for yield and they are swallowing whatever slop Wall Street puts in front of them.

It was just December 2008 when junk bonds were trading for 55.4 cents per dollar (and yielding 22.1%). They are now at or near a peak as risk appetites grow ravenous. Risk premiums (the spread between “risk free” treasuries and junk bonds) have shrunk to 3.1% , not very far away from their low of 2.41% in May 2007.

Municipal Bond Flows
According to both ICI and Lipper data, the exit from municipal bond funds continued but at a slower rate. This past week we had another $1.2 billion leaving municipal bond funds. That is the 13th consecutive week of outflows and brings the total hemorrhage to $24 billion since it began. I’ve been pounding the table on behalf of municipal bonds for a while now and we are starting to see a consensus developing from smart sources as well as confirmation provided by firmer prices. It wasn’t easy to disagree with Meredith Whitney but sticking to the facts helped.

Pimco’s municipal bond experts wrote a recent research report supportive of municipal bonds and Moody’s reported recently that CDS spreads for municipal bonds are narrowing. And iShares S&P National AMT-Free Municipal Bond ETF (MUB) had a great day and closed the week higher by +2.1%. I would have preferred to have Jim Chanos on board but he sounded negative on municipal bonds in his recent stop by CNBC this week.

Hedge Fund Flows
According to BarclayHedge/TrimTabs, hedge funds had an estimated $6.6 billion inflows for December 2010 bringing total industry assets to $1.7 trillion – the highest since October 2008. The inflow is bullish because usually we see year-end redemptions in December. Hedge fund investors are once again embracing risk with $5.8 billion going into emerging market funds – the highest inflow since July 2008.

Insider Transactions & Buybacks
Corporate insiders have been selling for more than a few weeks while the market has been going up. According to a recent report from Mark Hulbert, the Vickers Weekly Insider Report index of insider transactions has jumped from 7.07:1 (sales to purchases) in mid-December 2010 to 7.74:1 in January and finally receded somewhat to a slightly less frightening 5.45:1 this past week. The editor of the insider newsletter, David Coleman, is unmistakeably bearish and has not changed his position even as the market has ignored the torrent of insider selling.

Here is the insider transaction ratio based on data from Thomson Financial:

While corporate insiders as a group are busy selling their company’s shares as fast as they can, they have no qualms about issuing buy backs of those same shares with the corporations money. According to data from TrimTabs, US share buybacks are at the highest level since the fall of Lehman Bros. Last week, $27.3 billion buybacks were announced – the highest since September 2008. Companies are continuing to use their massive cash hoard to repurchase shares.

This may make shareholders happy and drive per share earnings growth but many fret that this is a sign that performance is once again being artificially manufactured instead of earned through profitable performance or growth. According to research from Citigroup, 37% of the per share growth of earnings in the S&P 500 may be traced back to buybacks if they match last year’s pace. TrimTabs estimates put the buyback programs so far in the year slightly ahead of last year’s weekly pace.

Option Sentiment
The ISE and CBOE put call indicators were little changed from last week. The 10 day moving average of the equity only ISE Sentiment index headed back up (indicating more call buying). It finished the week at 230 suggesting that more than 230 calls were bought in the past 2 weeks for every 100 put. The 5 day moving average climbed to 241 seemingly on its way to the record breaking heights of January.

The 10 day moving average of the CBOE (equity only) put call ratio fell slightly to 0.55 but overall, there were no daily spikes or tell tale signs of extreme exuberance. The real story in option sentiment this week is in the OEX put call ratio and more specifically the open interest ratio.

The OEX put/call ratio has been acting a bit crazy during these past few months. We’ve seen it zoom to the heavens and then crash in a schizophrenic fashion a couple of times. Frankly, the pattern is very odd and I haven’t been able to find a comparable time period in the past. Historically, the OEX put call ratio is seen as a ‘smart money’ indicator but the recent action isn’t winning it any praise.

If we instead look at the open interest ratio, the picture that emerges is much clearer. Right now the OEX open interest ratio is climbing furiously higher suggesting that there most are holding puts, waiting for the market to fall. Historically, a high level for the OI has marked market tops. As well, I noticed that when the OEX put/call ratio spike up coincides with high in open interest it tends to be a good indicator.

So the confluence of the high level of put buying (relative to calls) and the elevated OI ratio is giving me pause. Consider that we were seeing very high put buying from September 2009 throughout to January 2010. The equity market went higher, ignoring the high OEX put/call ratio. It was only when the open interest reached a peak of 1.31 in mid-January that the market topped out. The OEX OI ratio finished the week at 1.31.

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5 Responses to Sentiment Overview: Week Of February 11th, 2011

  1. PEJ says:

    Awesome post Babak.
    I’m guessing that the sentiment polls were collected before Friday’s “great news” that propelled the markets yet higher… Would be curious to see the impact.

    As for the PCratio, it seems like we are not at two 2 STD dev from the average anymore, but the 5, 10 and 20 DMA have been hovering at a distance further than 1 STD for a very long time now. Probably a record?

  2. DoctoRx says:

    Babak: Great work. Given all assets are overpriced except perhaps houses in the Midwest etc., I think your comments on gold may mark the relative bottom of gold vs stocks. I want to convert you from your evolved open-mindedness on gold to a hard-money believer. Just you watch. I don’t believe that many stock market participants really “believe” in being powerless minority owners of companies run for the benefit of insiders. Thus I believe stocks will melt down sharply after they finish melting up. I do however believe that after this shakeout in gold, it is in strong hands of people like me who “believe” in it just as much I “believed” in stocks continuously from 1979 to 2000.

  3. Allstreets says:

    Thanks for your hard work to provide another outstanding review of the state of sentiment. Like housing market in 2006, once the vast majority of qualified buyers were in (home ownership hit 69%, a record), and values began to roll over, the ratio of sellers to buyers tipped over. You need to get that last short guy in International Falls to go all in to form a top. By the way, VIX is another measure of sentiment and it’s been dwelling pretty low these days, and I noticed it didn’t make new lows with the recent new highs, another possible short term bearish divergence.

    It took several weeks of narrow price band trading to form the October-November recent top in bonds. It usually takes at least a week of relatively narrow range trading in near month stock index options to begin to create a top. To form a significant top in the cash market, ideally there’s a range of prices below a sideways range where there was little recent trading, so that not much ecent support exists there until a lower price range; I think I see that in the most recent OEX 555-575 thin range. Also needed is a little time of sideways trading in a range near but a little above the five week range 575-585, such as in the current area of 585-600, but not much higher. Upward spikes like last week on weekly charts are not usually tops while downward spikes often are bottoms. Three or four weeks sideways trading in the 585-600 range and then a break lower could quickly take out 575 and lead down to 550 or a bit lower. That would be a nearly 10% correction, and that might be it if sentiment sours. That would be a May crash low, a common seasonality event. Note that a break below an 8-week trading range of 575-600 would give a price objective of 25 points lower, or 550 the first area of recent support. However, I’m looking at a less likely alternative scenario, given current overbought state and extreme sentiment, of continued rally to 620-625, an area of the most recent long term resistance. I get that by adding the most recent 2010 trading range of 475-550, or 75 points, to the top of the range of 550. I also note there’s a gap down between 640 and 625 from June 2009 that needs to be filled, but that might be later rather than sooner. MACD and RSI indices are very stretched on daily and weekly charts, and weekly fast stochastics are topped while the slow is now lower than recently while prices higher, a bearish divergence.

  4. Albert Quan says:

    pls put in on your email list. when u changed web site, my email a/c not updated anymore. Thanks.

  5. Pingback: Sunday links: an unhappy bull market Abnormal Returns

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