Sentiment Overview: Week of February 25, 2011

Below is the sentiment summary for this past week

Sentiment Surveys
The weekly survey of retail investors from the AAII finds them quickly giving up the bullish cause. It seems that the few days of negative closes on major stock markets and perhaps the political turmoil in the Middle East is causing them to relinquish their bullish stance. The survey was conducted on Wednesday so it would have been natural for Tuesday’s major drop to have been on the mind of everyone watching the market daily.

The bulls fell to just 36.6% and the bears remained stable at 27.2%. The resulting bull ratio is just 50% meaning that of all those that are decided, half are optimistic and the other half pessimistic.

To find a lower bullish reading for the AAII weekly survey we’d have to cast our gaze all the way back to September 2010 when there were 31% bulls for the week of September 1st 2010. As well, the decline in relative bullishness is noteworthy as it takes the bull ratio down from almost 80% (reached in late December 2010).

Investors Intelligence
The survey of stock market newsletter editors shows a resurgence of bullishness with the bulls increasing slightly to 53.3% and the bears falling to 18.9%. This pushes the bull/bear ratio to 2.8:1 and close to the critical 3:1 level that I like to monitor for indications of extremes:

There hasn’t been the kind of outright bullishness in the Investors Intelligence that has created the spikes in bullish sentiment relative to bearish sentiment. But we’ve seen a clustering of bullishness just under the critical level. This is reminiscent of the summer of 2007, just before the push higher in late 2007 when both bullish sentiment and the market itself topped out.

NAAIM Survey
Similar to the retail investors, the NAAIM survey of manager sentiment shows that professional money managers are not wedded to their bullish convictions. This week the median exposure to the market from the NAAIM survey fell to 78% from 97% last week. This is the lowest since early November 2010. There is definitely a bullish bias in this survey but the reaction from the money managers to the small correction shows that they are sensitive to price drops. Had they instead increased their exposure or maintained it, this would have presented a much bleaker picture for the market from a contrarian perspective.

As well, the average exposure dropped from 84% to just 66%. The reaction was also notable for an increase in diversity of answers. This week those that responded to the NAAIM weekly poll were much more diverse as a group relative to the past few weeks when they have been very sure of their bullish stance.

The Consensus Bullish percent inched its way this week to 74%. That is not higher than the previous top from late December 2010, it is the highest level of bullish sentiment since the April-May 2010 market top. Back then, Consensus Bullish percent peeked above 75% before falling along with the rest of the market.

Daily Sentiment Index
As a result of Tuesday’s down market, the DSI for the S&P 500 index fell to 81%. You may recall that last week, the DSI had peaked at 93% and dropped to 90% later on. Larry MacMillan had commented then that if the DSI falls below 90%, it will trigger a sell signal.

Hulbert Newsletter Sentiment
On a cautionary note, Mark Hulbert writes that the Hulbert Stock Newsletter Sentiment Index (HSNSI) was at 58.2% this week, not far from its previous high of 65.5% (April 2010). As well, unlike the other sentiment surveys which we’ve looked at so far, the HSNSI didn’t react to Tuesday’s decline. Also, the measure for the Nasdaq stock market remains at 73.3% – ominously close to its previous high of 80%.

Consumer Confidence
The Thomson Reuters/University of Michigan index of of consumer sentiment for February jumped to 77.5, the highest level since January 2008. This is the final number for this month and shows an upwards adjustment from the preliminary figure of 75.1. The median of forecasts from a previous survey of economists was for 75.5, showing that this increase is expected (and even more is expected of the economy).

According to the Conference Board, their Consumer Confidence index continues to recover showing a resurgence in public mood about the economy. As well, the preliminary numbers are getting revised upwards, showing a strong pattern of improvement.

For February, the Conference Board Consumer Confidence index increased to 70.4 from a preliminary figure of 64.8. The expectations sub-index which measures 6 months in the future also rose to 95.1 – the highest since December 2006, before the financial crisis and the recession.

NYSE Margin Debt
According to data released by the NYSE, margin debt is rising sharply once again as traders and investors increasingly take on a more aggressive posture. From its low of $173 billion in early 2009 (just as the market was bottoming) it has risen to $290 billion (as of January). There is an inherent upward trend in this metric so we have to be careful to not take it at face value. However, even if we iron out the persistent uptrend that is due to increasing volume and activity on the Big Board, it is evident that margin debt, a key indicator of froth, is once again increasing.

Fund Flows
According to Lipper FMI, the latest week saw equity inflows of $2.6 billion. This was the 12th consecutive week of net inflows for equities. Much of that went towards domestic mutual funds ($1.8 billion) relative to international funds ($800 million).

This data is ex-ETFs but if we include ETF data, the picture gets a bit murkier. This past week there was a $66 billion outflow from equity ETFs – especially from the gigantic SPDR S&P 500 ETF (SPY) that dominates ETf trading. This divergence may be suggesting that institutional funds and/or short term oriented traders are leaving the US equity market as retail investors are returning to it through mutual funds.

Data from ICI confirms this trend with $6.4 billion destined for the equity market and of that $5.2 billion to domestic equities. At this rate, inflows to domestic equity mutual funds will match and overtake the previous high set in May 2010 ($13.8 billion).

The last two bar lines in the chart above are colored more darkly to indicate that they only include data for the first three weeks in February. The surge in equity prices seems to have lured back the once shy retail investors. This is a cautionary sign since retail investors are normally on the wrong side of the market. This is especially true during this cycle as we’ve seen them stubbornly sit out this rally.

Taxable bond funds, the darlings of the retail crowd throughout the equity bull market rally that started in early 2009, continue to receive fresh inflows. The latest data from Lipper FMI puts net inflows at $3.5 billion. According to ICI, US mutual fund investors added $1.5 billion to taxable bond funds in the latest week.

Municipal Bonds
The municipal bond saga continues with yet another net outflow bringing us to the 15th consecutive week of net redemptions. But according to data from Lipper FMI, the selling has subsided this past week with just $588 million leaving this sector. That is well below the peak of almost $4 billion for the week of January 9th 2011 which broke the record by about $600 million.

To put into perspective the sheer panic, consider that according to Municipal Market Data, the annualized 30 day volatility in the bellwether 30 year AAA municipal yield shot up to 27% in late December. That was almost 5 standard deviations from the historical average and needless to say, simply unprecedented.

According to ICI, mutual fund flows for the municipal bond sector continued at a slowed pace with $1.55 additional withdrawals in the latest week. This marks the 15th consecutive net outflows for this beleaguered sector of the fund industry.

The more speculative sub-sector of the municipal bond market, the high-yield municipal debt, has also started to see an ebbing of the selling seen in the past few weeks. For the week ended this Wednesday, outflows were $50 million which compares favorably with $80 million for the previous week.

In other news, according to this article from the WSJ, opportunistic hedge funds have started to gorge on the municipal bond market. As well, BlackRock has decided to close two municipal bond funds for unrelated reasons.

Option Sentiment
The option market continues to show a bifurcated nature. The ISE and the CBOE put call ratios are both showing a preponderance of call buying, the short gyrations this week notwithstanding. And the ‘smart money’ S&P 100 (OEX) index options are showing a very big push into puts.

The ISE sentiment index (equity only 10 day moving average) closed the week at 214, compared to 230 last week. The ISE responded to the declines earlier this wek but it was rather muted, taking the daily ISE Sentiment index down to just 155. I wasn’t impressed because there was still more than 1.5 puts being bought relative to calls bought to open a trade. Not so long ago, when there has been real fear in the market, the ISE has fallen to 100 (or even lower).

Meanwhile the CBOE equity only put call ratio declined to show any real sign of fear (or put buying). The daily put call ratio rose to a high of 0.72 but as you can see from the chart below, it did not approach levels that we would expect to see for a real sign of concern:

The most interesting aspect of the option market for me remains the S&P 100 (OEX). The 10 day average of the OEX put/call ratio continued to rise from last week’s 1.57 to 1.83 this week. The shorter, 5 day moving average spiked to 2.29 as institutional traders rushed this week into puts. This marks the highest level since late December 2010. In that instance the market quickly shook off this fear and climbed higher. The previous high was in early February 2007 and that marked a significant warning just before the February and March 2007 correction.

Even more interesting, the open interest ratio continues to climb higher. Unlike the put call ratio, this indicator moves in lethargic sweeps across the graph, marking intermediate highs and lows. We have to be patient to see any signal from this metric but we are getting a clear one now. Last week it was at 1.52 and this week it closed at 1.61.

Lows in the open interest put call ratio mark important lows in the market. For example, in August of 2002 it fell to a significant low of 0.66. That marked the beginning of the end of that bear market. Again, in late October 2008 it fell to a similar level and that marked the beginning of the end of that bear market.

When the short term moving average of the OEX open interest put call ratio reaches 1.60 or higher, it tends to signal a tired market. In the past, it has marked major tops with canny accuracy. If we combine the metric with the OEX put call ratio itself and only pick times when they were both showing the ‘smart money’ preferring to own puts instead of calls, we get an even better indicator.

This remains one of the most persuasive reasons for me to get out of this market. We may not see a correction but instead a sideways market to digest the gains so far. But in either case, this suggest that the market will have a difficult time forging ahead as it has so far.

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One Response to Sentiment Overview: Week of February 25, 2011

  1. DoctoRx says:

    Typo in title. Week not Feb 2

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