Below is this week’s comprehensive look at sentiment data for the market:
The weekly survey of US retail investors from the AAII shows little change from last week. The bullish camp declined slightly to 42.2% while the bears increased about as much to 31%. Overall, the bull ratio remained within the same range it has been for several weeks. At 58% the bull ratio is basically in line with its long term average so there is little edge offered from the current readings.
This was the belle of the ball in sentiment indicators last week and this week it continues to offer us something to mull over. Stock market newsletter editors monitored by ChartCraft pulled in their horns a bit this week to finish at 55.4%. But the bears were almost as difficult to find as last week at 16.3%.
This is the second week in a row where the number of bulls outnumbers the bears by a factor of 3 (or more). The last time we saw this was at the April 2010 market top. And prior to that, the December 2009 market top. So the Investor Intelligence is still providing contrarians with ample reasons to be very wary of this market right now.
Here’s a chart of the bull ratio for the Investors Intelligence survey compared to the S&P 500 index:
I’ve drawn a line at 75% – in other words, when the bulls are 75% of the total of bulls and bears. Right now this short term moving average is the highest it has been since May 2010. Being a moving average, it is a bit delayed of course, so that corresponds to the April top.
Ned Davis Crowd Sentiment
The Ned Davis Crowd Sentiment poll which is an aggregate measure of several individual sentiment indicators is once again at a bullish extreme. We looked at this several times. It managed to provide a good signal for April 2010 and started to climb into the extreme zone again in late 2010 (NDR Crowd Sentiment Poll At April 2010 Highs).
NDR officially considers a reading above 61.5% (see chart in previous link) to be “extremely bullish. While I don’t have numbers to share with you, in a recent column, Mark Hulbert writes pretty much all contrarians need to know:
This is the one category out of the four that, in Davis’ opinion, comes closest to yelling “sell.” He maintains two sentiment indices, one of which is well into the zone of excessive optimism and the other on the border of that zone. On contrarian grounds, that is worrisome.
The Consensus survey covers several hundred institutional sources among independent advisors and brokerage anlaysts and Wall St. research departments. Its cycle peak (76%) coincided with the February top but it is continuing to levitate at lofty levels, the March correction notwithstanding. It is currently at 71%. Historically such levels have corresponded with either major or intermediate market tops.
The NAAIM survey of active manager sentiment is where we left it last week: about 80% long exposure to the market. While they didn’t reach the same heights as in February (97% bullish), it would seem that the recent price weakness has not really been enough to cause this group to change their stance. Finally, based on the clustering of their responses to the survey, they are largely in agreement with each other.
Merrill Lynch Survey of Fund Managers
Hedge funds are enjoying a massive inflow of funds. As Charles Biderman explains in the link this is both to be expected since February is traditionally the best month and also based on the size of the inflows, this is a contrarian indicator as usually performance suffers going forward.
Hedge fund managers are not shy about taking serious risk with this bumper crop of new funds. According to the most recent ML survey of hedge fund managers, even though as a group they are expecting poor economic performance and corporate profitability, they are piling into equities and eschewing cash.
Only 27% believe that the world economy will improve in the next 12 months (compared to 58% in February). And only 19% believe earnings will improve in the same time period (compared to 32% in March). Even so, with sliver thin interest rates cash is not attractive and the risk of inflation makes bonds dangerous so most are choosing equities as their asset class of choice.
Overall cash balances in portfolios has fallen to 3.7% form 4.1% in March. By the way, this is in line with the less glittery mutual fund world where cash balances are appx. 3.5%. A net 50% are overweight equities this month compared to 45% in March. Much of that is going into emerging markets with 22% now overweighing that sector compared to 0% last month.
But they are also positive on the US market with a net 30% overweight the US equity market. Among sectors, energy is a favorite because it is seen as a hedge on inflation. Within international markets, there is a continuing concern of a slowdown in China but Asia (excluding Japan) continues to be the favorite emerging market – Latin America the least.
The general sense I get from this months survey is that while hedge fund managers aren’t too happy about it, they don’t see a better source of generating performance than equities. So they are more or less ignoring any discouraging signs and seeking comfort in a herd like mentality. Or am I being too harsh?
NFIB Small Business Optimism
The NFIB Small Business Optimism index notched down this month to 91.9 due to poor economic expectations as well as questionable earnings and profitability outlook. The current level corresponds to the October 2010 level (91.7).
An interesting development in the sub-indexes of the NFIB Small Business Optimism index is the rapidly rising “Prices” component. The seasonally adjusted number rose to net 24% of small business owners that are planning to “raise prices”. This is the highest for 30 months and with a slowly improving economy and consumer confidence, the increases in prices will eventually translate into inflation.
The preliminary report for the Reuters/University of Michigan Consumer Confidence survey showed a slight improvement from the abysmal March levels. The consumer confidence metric climbed more than expected to 69.6 in April from 67.5 in March (final).
Employment has been improving – the official US unemployment rate is now at a 2 year low – and that has started to be felt by consumers. But at the same time, the rise in fuel and food costs has put a lid on any real enthusiasm on the part of US consumers.
The current conditions sub-index of the metric has been relatively constant over the past 6 months while the expectations sub-index has fallen and is meandering very close to the depths that we saw way back in April 2009.
According to ICI US retail investors withdrew a net $335 million from domestic funds. In contrast, Lipper FMI reports that $800 million was added. Foreign equity funds attracted $2.8 billion according to ICI while Lipper FMI reports an inflow of just $600 millon for non-domestic equity funds.
Here is a chart of the total equity fund flows as reported by Lipper FMI (4 week rolling average):
US investors returned to equity mutual funds en masse and topped out in January 2011 for the next month. In response to the March correction, they quickly abandoned this asset class and are now slowly starting to come back to it.
Turning to fixed income, according to data from Lipper FMI the hemorrhage in the municipal bond market continues with over net $900 million sold this week. Remarkably, since the volatility began in this once staid area of fixed income, almost $31 billion has been removed by investors – this represents appx 9% of the total assets within this sector.
Taxable bond funds are continuing to receive fresh funds with an additional $6 billion this week according to ICI. Both foreign equity funds and taxable bond funds have received positive inflows for every single week since the start of the year.
Initial Public Offerings
The IPO market is cracking open in a big way. We’ve got several very large new issues slated to get priced very soon. Among these is Glencore, a giant in the commodities market expected to price itself at appx. $60 billion and sell about 20% of that in the market. If you’re going to go public, timing is very important and it isn’t just a happenstance that Glencore’s IPO coincides with the commodity supercycle top.
What you have to ask yourself is this, are you smarter than the most plugged in players in commodity? If they are selling now, doesn’t that tell you that they believe now is the best time to get top price for their paper? If this was the best time to buy, don’t you think they would be out there buying up other smaller players instead of selling their equity to you?
Several other smaller IPOs priced this week as well: Zipcar (ZIP), Arcos Dorados (ARCO) and Box Ships (TEU). For the most part the reception was positive showing that investors are warming up to new issues and happy to take on new risks.
The most interesting IPO (possibly of the whole year) will be Groupon. The timing and reception of Groupon will provide us with much more information about the mood of the market than other smaller IPOs. This is not just for its size but also because it is generally seen as a fast growing online company comparable to other upstarts like Google or Amazon in days gone by.
We’ve certainly come a long way from when the IPO market shut with a loud thud. That was a great contrarian sign to buy. Now that we are starting to see some excitement, I can’t help but wonder if it means the opposite.
Were it not for the two peaks of uber-bullishness set in December 2010 and January 2011, the ISE Sentiment index here would be telling us of a very bullish oriented retail option market. The 10 day average of the equity only ISE index peaked at 227 in early April. This week it closed at 206 which is still double the number of calls purchased to open a trade compared to puts purchased to open a trade.
But after seeing so much constant bullishness day in and day out without any let up, it is difficult to get our bearings straight from this indicator. It looks like we are seeing another smaller double top corresponding to the mid-February highs.
The CBOE equity only put call ratio (short term average) increased appx. 8% from last week to close at 0.61. Considering the almost non-stop rally from last summer, it is difficult to notice any risk jitters in this options market. The lethargic put buying seems to imply that everyone expects a correction to be shallow and short-lived.
In contrast to the above option readings, the S&P 100 index (OEX) options market is telling a whole different story. I touched on this yesterday to remark about the rapid rise in put option purchases in this traditionally more institutional pocket of the options market.
Both the 5 and 10 day moving averges for the OEX put call ratio closed at appx. 2 this week. By itself, this wouldn’t be enough to warrant serious attention. But the fact that we are seeing this much put activity combined with a (once again) elevated level of open interest makes this a serious development.
The last time we saw a similar situation was February when I continuously pointed to the same buildup of puts by these traders as an ominous sign. The correction that followed all those warnings was surprisingly brief. But once again we are seeing these traders sock away puts like they are going out style.
The 10 day moving average of the OEX put call open interest ratio is at 1.75. The last time it was in early March. In fact, all through the correction there was little letup in this indicator. It is almost as if a really big move is expected and these traders don’t want to be shaken out of their short oriented positions.