Below is this week’s sentiment summary for the markets:
The weekly AAII survey of retail investors sentiment continues to show a surprising lack of enthusiasm for equities even as they hover near their highs. This week 31% polled expected stock prices to be higher in 6 months (down from 36% last week). The bears increased slightly from 32% to 36% bringing the rolling four week average of the bull ratio down to 51%:
Currently the bull ratio is not only smaller than we might otherwise expect from the market conditions, it is also below its long term average. Over the past 15 years, 58% of those decided have been on average bullish. This week that stands at 46%. Also, the long term average of the bulls is 42% (compared to 31% this week).
In contrast to the retail investor sentiment, newsletter editors continue to be unabashedly bullish in their outlook. Advisor sentiment as measured by ChartCraft’s weekly metric shows the majority (51%) yet again bullish and the bears at just 18.5%. The (four week) bull ratio stands almost unchanged at 75% where it has historically marked market tops:
This survey of active professional money managers shows that they are quickly returning to increase their long exposure to the stock market after the recent correction. The current median portfolio exposure stands at 85% (and the average at 75%). It is not yet at the bullish extremes that we saw just before the correction in February when the median reached a high of 97%:
The Thomson Reuters/University of Michigan Consumer Sentiment survey inched slightly higher from last month’s final 69.8 to a preliminary 72.4 (for the month of May). Some analysts attribute the small increase to a celebratory mood after the death of Osama bin Laden last week. In either case, it is still a long ways away from its height of 77.5 reached in February.
Gold & Silver Sentiment
In case you missed the coverage of the precious metals market, see: Sentiment Adjusts Downward – Finally. In short, I expect the gold market to recover from the silver induced correction but there are still far too many silver die-hard bulls (including a scary group of conspiracy nuts). You’d think a correction after hitting a DSI of 97% where everyone and their uncle was optimistic about silver would be natural but to far too many it is “manipulation”.
According to data from the ICI, for the first week retail mutual fund investors withdrew a net $2 billion from domestic equity mutual funds. This confirms the lackadaisical attitude we observed from the AAII weekly figures (see above). Fixed income funds continued to be the favourite asset class as they received another $6.4 billion this week and brinign the cumulative total to $690 billion since January 2007 (compared to $318 billion withdrawals for domestic equity mutual funds).
Municipal bond funds, for the 26th consecutive week, had net withdrawals but at a much reduced rate of just $274 million (compared to almost $5 billion in December). The municipal bond continues to build on its recent strength as reduced primary supply and underlying yield
hungry demand pushes up prices. According to Thomson Reuters, year to date, supply is down 54% while coupon payments which will arrive in about two weeks will provide another push through the reinvestment period over the summer.
After a spike up in April, for the second week in a row, corporate insiders are returning their ratio of sales to purchases back to more normal levels:
US Dollar Sentiment
Based on retail forex trader’s aggregate positions as measured by the Speculative Sentiment Index (SSI) the US dollar has seen a significant low against the Euro. For the first time since January 2011 retail forex traders have switched to the short side providing a contrarian signal that the recent dollar strength will persist for some time. We’d already seen other sentiment gauges provide a similarly extreme lopsided view of the US dollar and going into even more extreme territory than both the 2008 and 2009 US dollar lows. This retail sentiment measure of actual forex trader’s positions gives us confirmation of this contrarian signal.
Options Market Sentiment
To add to the previous discussion of option market sentiment from yesterday (see: Retail Option Traders Surprisingly Nonchalant), here are a few more charts.
Starting off with the ISE Sentiment index, the equity only ISE metric fell to 183. While this suggests that retail traders are buying almost twice as many calls as puts to open an options trade, on a relative basis, it isn’t as alarming. After all, even though the stock market is higher now, the 10 day moving average of the (equity only) ISE Sentiment index is almost as low as it was back at the March 2011 lows.
The shorter, 5 day moving average of the same call put ratio actually fell lower. On March 18th 2011 it was 173 as the S&P 500 index fell to 1260 (appx.) and earlier this week on Tuesday it fell to 172.
The more popular CBOE equity only put call ratio is also surprisingly high, considering that the market hasn’t fallen that much:
Of course, this put call ratio, like so many indicators, goes through different phases and resets its requisite definition of “extreme”. If we were to zoom out from this short term view, we’d see the current level as being very close to “average”.
Finally, the S&P 100 index option market. As has been the case for several months now, the OEX has been quite lopsided on the short end of things. Being a more institutional playground, this option market is suggesting that while the market may be rising now, it is reaching into thin air territory. Due to the option trades this week, the open interest put call ratio for the OEX is now higher than it’s past peak in February 2007 at 1.89:
The put call ratio for the OEX has also been chopping around just below 2, implying twice as many puts being traded as calls. This week the 10 day moving average briefly peaked above 2 close to the multi-year high it set in mid-April at 2.14.
This option indicator has a good track record but it provides rare signals that may be seen as early warning signals. I find it interesting that while the market weakened recently, these option traders hardly gave up their ultra-bearish leanings and instead have intensified them. Like the 2007 experience, they will probably be early but it is important to pay attention to them.