Here is this week’s overview of sentiment data for the financial markets:
The weekly AAII survey of US retail investor sentiment continues to wade deeper into the bearish side with just 26.7% expecting stock prices to be higher and 41.3% expecting them to be lower. This pushes down the bull ratio down to 39% slightly below what we saw at the most recent shallow correction in mid-March.
As well, the Farrell Sentiment Index, which we looked at previously in March 2011 is below 50% – the interpretation of this alternative measure of the AAII data is that when it is below 0.50 and rising, it is bullish:
After several weeks of extremely bullish consensus, the metric of newsletter editor sentiment has finally started to re-align with the AAII. This week ChartCraft’s advisor bullish sentiment survey results fell to 45.6% (from a recent high of 57.3%) and the bearish sentiment inched higher at 19.6%. Overall, the bull bear ratio 2.33:1 from a recent high of 3.65:1 but the bull ratio continues to be rather elevated at 70%:
According to a study by Ned Davis Research, over the past 40+ years the bull ratio has been this much or higher just 21% of the time. Not surprisingly, during those periods the stock market has on average lost ground.
NAAIM Survey of Manager Sentiment
The NAAIM survey of active money managers was a bit less bullish this week with the average exposure at 68.4% (from 75% last week) and the median at 80% (down from 85% last week).
Market Vane’s bullish sentiment percentage ticked down 6% this week to 58%. This is down from a recent high of 65% but it continues to be relatively elevated denoting an excessive bullish bias.
The bullish percent from Consensus is likewise. At 70% this week (down 3% from last) it is slightly off the highs seen earlier in the year but it is still quite extreme, signalling a contrarian bearish environment for the stock market.
Bank of America Merrill Lynch Fund Manager Survey
The May survey of institutional money managers by Merrill Lynch reveals they are seriously concerned about the continuation of economic expansion, especially in Europe. Of those surveyed, only 10% expect the global economy to expand, down from 27% in April and 58% in February of this year. Economic expectations for Europe dipped into negative with a net 8% expecting their economy to weaken over the next 12 months. In March a net 32% were expecting the Eurozone economy to strengthen.
The reduced expectations for economic growth has influenced managers to trim their exposure to equities and commodities and to add to cash and fixed income slightly. In spite of the reduced equity exposure, managers continue to press into emerging equities with a net 29% overweight the region within their asset allocation. This is the highest level for any geographic region and a big jump from March when it was zero.
US Dollar Sentiment
The US dollar seems to have rounded a corner as it gathers more fans this week. Nomura’s strategist Bob Janjuah who is an uber-bear has even titled it his favourite asset for the rest of the year. But retail traders, as measured by the SSI, are once again net long the US dollar, after flipping last week into a rare short position against the Euro.
Institutional traders, as polled by the Merrill Lynch Survey of Fund Managers have reduced their exposure to the Euro. A net 60% believe the Euro to be overvalued, the highest since December 2009 (compared to 40% in April and 25% in February). In contrast, a net 48% believe the US dollar to be undervalued, compared with a net 36% in April.
This week marked the arrival of a much awaited initial public offering from the online professional networking website LinkedIn (LNKD) on the NYSE. It also augured something we haven’t seen in a very long time, the one day IPO pop as the stock jumped +90% on its debut. Undoubtedly, some of that pop must be attributed to a raging demand and optimistic outlook for IPOs, especially from the online social media sector. IPOs are making a bit comeback, surging to 2007 levels and that is a sign of the generally bullish mood.
Some are also questioning the motives or competence of the underwriters in underpricing the offering to such an egregious amount and “cheating” the company out of the additional funds (and funneling the easiest money possible to their favorite institutional clients). That would be a valid charge had LinkedIn (LNKD) sold more than a paltry amount of their equity (5.3%).
According to a study done by Ned Davis Research looking at sector rotation during periods immediately preceding market tops we are entering the last stages of the cyclical bull market that started in March 2009. The consumer staples and consumer discretionary do well, while the financial sector do relatively poorly during such a period. That has been the case for the past few months. This does not mean that the bull market is over but that we are entering the last and final part of the bull market.
Mutual Fund Flows
According to Lipper FMI, US domestic equity mutual funds saw an inflow of appx. $600 million and foreign mutual funds, appx. $1 billion. Data from ICI for the past week shows a net withdrawal of $2.25 billion from domestic mutual funds and an inflow of $1.3 billion towards foreign funds. Mutual fund flows corroborate the limited enthusiasm we are seeing from surveys such as the AAII above.
According to Lipper FMI, taxable fixed income funds received their 22nd weekly positive inflow of $3.9 billion (ICI data was $4 billion). Meanwhile, municipal fund net outflows seem to be abating slowly. Based on figures from Lipper FMI, only $145 million was withdrawn this week bringing us very close to parity and back to normalcy:
The option market is little changed from last week. The ISE Sentiment index (equity only 10 day moving average) closed at 179, up slightly from the week’s low at 172. At these levels, it is difficult to interpret the ISE as being extreme but it is not low enough to be neutral either.
The CBOE (equity only) put call ratio continues to inch up, even though the stock market hasn’t really weakened as much as would warrant it. The 10 day average of the CBOE put call ratio closed at 0.68 this week, up slightly from last week’s 0.64 and basically where it stood at the low of the mid-March correction:
The OEX put call ratio also went down this week and ended at 1.74 (from a recent high of 2.0). However, the open interest put call ratio remains very high at 1.81 and continues to warn of an impending market top.