Here is this week’s summary of sentiment data for the financial markets:
The weekly AAII survey of US retail investor sentiment shows an increasingly bearish picture. For the third week in a row there were more bears (41.4%) than bulls (25.6%). Of those decided, only 38% are optimistic. This is the lowest level since August 25th 2010:
As way of comparison, the current bull ratio stands at 38.2% while its long term average is 58%. So the current level is about 34% lower than its historical trend.
Similar to the AAII retail metric, the Investors Intelligence‘s Advisor Sentiment Index which monitors the mood of stock market newsletter editors is switching to the bearish side. The bullish camp has deflated from a recent high of 57% to just 43% this week. The bears meanwhile are steady at 19.4%. The bull ratio stands at 69% which is slightly above its long term trend of 61%:
NAAIM Manager Sentiment
This sentiment gauge of professional money managers measures their portfolio’s exposure to the equity market. This week market exposure continued to decline for the fifth consecutive week and stood at 60%. Just six weeks ago it was 83%. Also of note, the responses to the survey were dissimilar rather than clustering around tightly around the average. This implies that many managers disagree with one another about the direction of the market.
The final result of the Thomson Reuters/University of Michigan survey for May notched a bit higher than the preliminary 72.4 to 74.3. This is the second month we’ve seen an improvement since the low in March (at 67.5) when gas prices spiked. But the index is still far away from the February high of 77.5 and farther still from the high in January 2007 at 96.9 before the bear market:
Insider activity by several measures has become supportive of the market lately. According to the Thomson Reuters ratio of sales to purchases, we’re seeing a dramatic decline from earlier in the month:
This is confirmed by the insider data from the Vickers Weekly Insider Report. According to the newsletter published by Argus Research, the ratio fell from a high of 5.64:1 in early May to just 3.28:1 at the end of the month. While the ratio is still skewed to selling, we have to keep in mind that it is always thus because of the avalanche of stock option and stock purchase plans that allot equity to insiders as part of their compensation. So what is important is not just the nominal level but the change in their activity. Based on reporting from Mark Hulbert, the current insider state is not as bullish as the ratio implies from Thomson Reuters but overall, it is supportive of the market.
The IPO market continues to pick up speed with May closing out a fantastic month for activity, results and the pipeline. The volume of deals priced in April and May has now outpaced the entire first quarter of the year. The re-opening of the IPO market after the bear market has resulted in a mad dash by companies to go public. We now have 169 companies, according to Renaissance Capital, filing to go public. This is the largest pipeline activity since the tech bubble in 1999. So if the IPO market remains open and receptive to deals, we will see activity pick up even further and reach a crescendo soon enough.
Even though we are seeing it go from strength to strength I’m wary to label this an “IPO bubble”. The major reason is that even as the activity and performance builds, overall investors seem to be rather selective in their patronage. We have yet to see an indiscriminate clamoring for IPOs.
Mutual Fund & ETF Money Flows
According to the Investment Company Institute, mutual fund flows for US domestic equity funds were negative to the tune of $1.5 billion. If we include ETF fund flows, the sum increases to a net outflow of appx. $4.1 billion, according to data from Lipper FMI. Two specialty funds received especially heavy inflows: the SPDR Energy ETF (XLE) saw an increase of more than $500 million this past week and the MarketVectors Agribusiness ETF (MOO) had inflows of (appx.) $500 million. Even so, as an aggregate, mutual fund managers are playing very aggressive with just 3.4% of assets in cash (the same as July 2010).
So far in May, domestic equity fund flows have increased to almost $6 billion. The month is not over yet (since fund flow data is a week late in reporting) but if it continues at this rate, it will be the worst since December 2010 when there was a monthly net outflow of $12.2 billion. Even now, we are again close to a new net cumulative low (since January 2007) with over $323 billion exiting the stock market in the US via mutual fund redemptions.
Lipper FMI reports foreign mutual funds had a net outflow of $1.1 billion (with an additional $400 million exiting via ETFs). The ICI in contrast shows foreign mutual funds receiving inflows of $1.48 billion this past week ended Wednesday.
In fixed income, taxable bond funds continue to dominate with an additional $6.5 billion inflow for the week according to numbers from the ICI. This is the largest single weekly inflow for some time. Lipper shows just $3.8 billion of inflows for taxable bond funds. Based on ICI figures, if the weekly trend continues, this will be largest inflow for taxable bond funds since October 2010.
Municipal Bond Funds
Municipal bond funds are creeping along with small withdrawals, showing relative strength compared to the recent hemorrhage they suffered thanks to the repeated scare mongering by Meredith Whitney – most recently last week in her WSJ Op-Ed piece. The municipal bond market yawned in reaction to this article instead of going into full-blown panic mode like last time. But in an interview published the same day with the Financial Times, Whitney seemed to be taking a tentative step back saying that her prediction of hundreds of billions of dollars in state defaults were “approximation for the current cycle”.
As well, the high-yield municipal bond fund sector saw inflows as yield-hungry investors snatched up bonds priced competitively to taxable fixed income paper. This week there was inflows of $15 billion and the prior week had inflows of $95 million according to Lipper FMI. Unlike corporate bonds, the “high-yield” appellation in municipal bonds doesn’t mean ratings below BBB but instead can include A-rated bonds that are subject to conditions like the alternative minimum tax, etc.
Corporate junk bonds are in high demand with an aggregate global volume of $56 billion for the month of May according to Dealogic. The vast majority of that was US deals worth $46 billion – a new monthly record. The Bank of America Merrill Lynch High Yield Bond index touched a new low for the week at 6.64% (But climbed slightly later in the week). The recent drop in US treasury rates – a benchmark rate – has opened up a window of opportunity for very low financing rates and companies are trying to push through deals as fast as possible before it changes. For more, see: “Junk bond sales of $56bn set monthly record”
After the panic selling brought on by the implosion in the silver market earlier this month, gold spent the rest of the month recovering. Several measures of gold sentiment are now back to either normal or extreme bullish levels. Probably the most bullish one is the Bloomberg Gold Sentiment index. Among those who are decided, 94% are bullish. This is the highest level since June 2010 after which the precious metal endured a period of underperformance.
Overall, the option activity this week was supportive of higher stock prices. The only option metric that disagreed with the others is and has been the S&P 100 index put call ratio which we’ll take a look at later.
The ISE Sentiment index which measures retail option activity fell to a 10 month low. The 10 day moving average of the ISE call put ratio fell to a low of 165 mid- week before recovering later:
The CBOE put call ratio for the whole market confirmed the ISE sentiment index’s bullishness by reaching a high of 0.69 earlier this week. This is the highest level of put activity relative to bullish call activity since last summer and slightly surpassed the March correction’s level:
Even though the current correction has been very shallow, the option sentiment has fallen to similar bearish levels that we saw during much larger corrections. This is also true for the Nasdaq 100 Powershares ETF (QQQ) which is scraping the bottom of the chart.
As I mentioned, the S&P 100 index (OEX) option market which is usually the playground of institutional traders continues to show them positioned to take advantage of a market tumble. The OEX put call volume ratio and the OEX open interest put call ratio both are at very elevated levels – although they have ameliorated somewhat in the short term – and historically, this corresponds to a market top. The only caveat with this indicator is that it can precede market tops by several weeks to months and is an infrequent signal.