Here is this week’s overview of sentiment data for the financial markets:
The retail investors sentiment survey conducted by the AAII continues to show a lack of bullish enthusiasm with just 35.5% expecting the stock market to be higher in the next 6 months. That compares to 32% who are pessimistic and expect it to fall. The result is a bull ratio at 53%, not far from its long term average of 58%. So overall, we are seeing a tepid result from this indicator.
The AAII asset allocation survey provides for small changes this month with a small uptick in equities to 63% of their model portfolio and a similar reduction in bond allocation to 19%. Cash was unchanged at 18%. Equity allocation is approaching elevated levels but has not yet reached recent heights we’ve seen from earlier this year.
ChartCraft’s Advisor Sentiment survey monitoring stock market newsletter editors and market services is continuing to be a fertile source of contrarian signals. The bullish camp was relatively unchanged at 55% this week but the bearish camp once again fell to 16.5%, approaching levels that show an extreme lack of fear or concern for declines. This also resulted in the bull bear ratio hitting 3.33:1 a level that we last saw in early April and January 2011.
The lowest bearish reading we’ve seen recently was on April 6th at just 15.7%. Since the bullish reading at that time was higher than now, it provided us with a bull bear ratio of 3.7:1. Historically, when we see such a lack of consideration for the downside, the market invariably suffers a correction (sooner or later).
NAAIM Survey of Manager Sentiment
Active money managers surveyed in this poll were slightly less bullish than last week with an average 75% exposure to the market (down from 82% last week). However, we are still seeing this group crowding on the bullish side:
The decline in the final number comes as a result of the most bullish becoming slightly less bullish and the first tiny glimmerings of short exposure from the bears. As noted previously, it was impossible to find anyone among these money managers that were making bets against the market. We’re starting to see that now but they are by far still very bullish.
Reuters Asset Allocation Poll
Of the 56 global institutional money managers polled by Reuters, the average reduced their equity exposure in equities from 52.6% to 51.3%. Fixed income allocation rose to 34.6%, the highest since October 2010. Cash allocation was raised to 5.1% of portfolios, the highest since September 2010.
The historically weak seasonality that we’ve moved into (“Sell in May and Go Away”) as well as questions about how long economic policies that have provided easy monetary conditions for the past 3 years will persist. Regionally, US money managers had 63.3% exposure to equities, down from 64.9% last month. They are still the most aggressive compared to their European and Asian counterparts.
Rydex Advisor Sentiment
This measure of investment advisor sentiment remained relatively unchanged from last month at 113.54:
The dichotomy between consumer confidence and investment advisor confidence that was initiated back in 2008 is still continuing.
Leveraged ETF Assets
Retail investors are rushing to make leveraged bullish bets on the stock market through ETFs. For complete coverage of this and a chart, see: Leveraged ETF Ratio: Another Stock Market Top Sighted.
For the second week, corporate insiders are providing an extreme signal with a very lopsided ratio of stock sales relative to stock purchases. We normally expect these market players to sell more than they buy but at this ratio, we have to ask if they know something that others don’t:
Mutual Fund Flows
According to Lipper FMI, mutual fund flows for the week ended May 4th show $962 million of inflows into domestic mutual funds and $386 million into foreign mutual funds.
ICI reports $906 net outflows in equity funds with the majority of that coming out of domestic mutual funds and $180 from foreign funds.
Based on data from Lipper FMI, this week also saw $3.7 billion going into fixed income, the 20th consecutive net inflows for this sector. ICI reports fixed income receiving $3.6 billion of inflows.
Municipal funds, a long time source of volatility within fixed income is continuing to bleed money with an additional $784 million exiting the once sleepy sector according to Lipper FMI. This marks the 25th week of consecutive outflows and since late 2010, brings the total outflows to between $33.5 to $47 billion.
Some may have forgotten Meredith Whitney’s December 2010 predictions of Armageddon for the municipal bond market. She hasn’t given up and is adamant that she will be proven right. Whitney did not provide a specific time frame, expect the vague “next year”.
So far, municipal bond funds have recovered from the panic selling and while retail investors continue to flee the market, the bonds themselves have stabilized. David Kotok of Cumberland Advisors wrote recently:
We are going to dig in our heels on the other side. We do not expect nor do we forecast that defaults on Munis in 2011 will reach anywhere near $100 billion. When we use the term default, we mean the non-payment of an interest or principal amount due on a bond issue. We are not talking about technical defaults where a bond covenant may have been breached and subsequently cured. We are talking only about money payments.
So Meredith, you say “yes” on $100 billion of defaults in 2011. We say NO! On December 31, we will know who is correct.
Municipal credit-default swaps are returning to normal levels after the panic from late last year:
Source: A Lack of Supply Feeds Rise in Munis
But there are still lingering questions. The stabilization of the municipal bond market may have to do more with the lack of supply than strong demand
Precious Metal Sentiment
The big news this week, of course, was silver. I did not mince words when it came to this market, even though what I was saying was not popular. Normally, after such a vicious decline we’d expect bullish sentiment to be annihilated. But that’s not what we’re seeing in silver right now. As silver grasps for support, retail traders are bloody but unbowed, muttering about COMEX/CME conspiracies. On Monday the initial and maintenance margins will be $21,600 and $16,000 respectively. To get a glimpse of the retail mood, read the comments on this article.
As I warned, gold would be affected by the implosion in silver. My previous commentary on gold sentiment also provided several reasons why gold, by itself, was top heavy and especially vulnerable at this time to being pushed by silver’s decline. In the short term, gold is close to finding support.
But we don’t have strong indications that this would be a lasting floor. The Hulbert Gold Newsletter Sentiment index dropped from its recent high of 74% to 67%. But that isn’t enough. At the February 2011 lows, it was below zero (the average gold newsletter editor was recommending a slight short exposure to gold stocks!). So I would still be leery about gold, unless you’re playing it within a very short time horizon. From this and other sentiment indicators, it looks like we need to flush out the weak hands a bit more before being able to resume the long-term uptrend.
US Dollar Sentiment
Sentiment towards the US dollar is scraping the bottom of the chart. Even though the US dollar index is still significantly above its 2008 lows, the corresponding sentiment towards the dollar is much much lower than at that time.
We saw a sharp rebound in the dollar on Thursday and Friday of this week. Of course, in the media, that was attributed to rumors that Greece was considering exiting from the European monetary union.
Initial Public Offerings
The IPOs keep rolling out. One of the more interesting IPOs to be initiated recently is by Dunkin’ Brands Group (proposed symbol: DNKN), owners of the Dunkin’ Donuts and Basking Robbins ice cream stores. This represents and exit for a group of private capital investors (Bain Capital, Carlyle Group and Thomas H. Lee Partners) who bought the company from Pernod Ricard in 2005 for $2.4 billion. For a chart of IPOs see last week’s sentiment overview.
Option markets are relatively unchanged from last week and for the most part are not providing a clear contrarian signal. From the ISE option market we saw a few days of very low readings suggesting that retail option traders are finally picking up some puts. The 5 day moving average of the (equity only) ISE Sentiment index fell to 178, close to the levels that we saw in mid-March 2011 when the stock market rebounded.
The CBOE traditional put equity ratio was basically unchanged from last week at 0.60 – so it is not even close to providing a clear “fear” signal. The S&P 100 (OEX) option market reacted to the market declines this week by ratcheting up to an even more bearish posture. OEX option traders on Tuesday bought 2.48 times as many puts as calls and on Tuesday, the ratio was 2.73 and on Friday 2. This pushed the 10 day moving average of the put call ratio up to 1.83. It had topped out earlier in mid-April at 2.14. This would suggest that the institutional traders are not impressed by the retracement and are expecting more. The open interest put call ratio remains elevated as well, although down from its recent highs.