Here’s the weekly sentiment overview for the markets:
Starting off as we do usually with the weekly retail investor sentiment measure from AAII we find them increasing their bullishness to 30.2%, after four consecutive weeks of declining optimism. But the gloomy bears still managed to outnumber their optimistic peers at 33.4%. At 47%, the bull ratio is significantly below its long term average of 58%.
Although there was an increase in both bullish and bearish camps from ChartCraft’s Advisor Sentiment index, they were proportional and therefore, left both the bull ratio and the bull/bear ratio intact from last week. Investors Intelligence bullishness increased this week to 45% and bearishness inched higher to 20.4%. Once again, at 69%, the relative bullishness of those decided in the poll is markedly above the long term average of 61%.
NAAIM Survey of Manager Sentiment
Active managers polled this week continued to rein in their equity exposure, reducing it to just 53%. This is the lowest since late March (right after the shallow spring correction). Also of note, the results of the survey indicate that by far, most managers agree with one another to arrive at this ‘average’ exposure.
As well, we are starting to see a resurgence of money managers who are truly bearish and positioning their portfolios short. At market peaks we usually can’t find anyone being short but now, over the past four weeks, the most bearish managers are positioning their portfolios short 112.5%. This isn’t yet at levels that would signal a lasting market low but it does indicate that managers are not stubbornly sticking to a bullish thesis.
Consensus’ Bullish percent measure of sentiment has fallen from above 75% in mid-February to 60%. The previous peak was a multi-year high that has usually indicated with precision market tops (or at least areas of resistance where prices plateau).
Hulbert Stock Newsletter Sentiment
While the newsletters tracked by Hulbert have reduced their exposure to the stock market, it isn’t enough (yet) to allow for a renewed assault towards new heights. According to Mark Hulbert, we will need prices to move down more to build the ‘wall of worry’.
Currently, the HSNSI which measures the recommended exposure of newsletters that advise their clients on market timing, is at 46%. This implies that the average newsletter is suggesting being long the stock market with less than half of their buying power.
To put that in perspective consider that since March 2009 when the recent bull market began, the HSNSI has averaged 34.6%. And that in early May their recommended exposure was 67.2%.
In order to see a substantial floor under prices, we’ll need to see the HSNSI drop to at least zero. At the lowest point of the March correction, it fell to 16%. But more lasting market lows arrive with negative numbers – such as the July 2010 period which had -16%.
Reuters Asset Allocation Poll
The monthly survey of global institutional money managers for May shows equity allocation down to 50.7%, the lowest level since August 2010. As the Greek and other peripheral Euro debt crisis refuses to go away, investors are once again reducing their risk exposure and ratcheting up their expectations of a global slowdown. This is the fourth consecutive monthly decrease in equity allocation.
As institutional investors decrease their risk exposure to equities, they are increasing both fixed income and cash. Cash levels have soared to 5.2%, the highest since September 2010:
The last time cash levels were higher was last summer and early 2009, just as the most recent bull market was getting started. Taking a contrarian view, this survey is suggesting that we are very close to reaching a level of pessimism that would allow for another leg higher.
Rydex Advisor Sentiment
The Rydex Advisor Sentiment index captures the sentiments of 150 independent registered investment advisors. For the past year and more we’ve been observing a huge gap between financial advisors’ overall bullish views in contrast to their clients’ much gloomier opinion of the economy and the stock market.
For the month of May, the index dropped to 111.67 from last month’s 113.54. This is the fourth consecutive down month pulling the index down 9% from its peak in January of this year:
That marked a four year high (see red circles in above chart). Over that time, short-term pessimism towards the stock market has increased. Their outlook for the Stock Market sub-index has dropped 17% over those four months.
But advisors’ 12-month Economic Outlook sub-index jumped a whopping 9.54% this month. This comes after several poor months and it is the largest one month jump since September 2010.
Prudential Survey of Retail Investors
A recent survey conducted by Prudential asked more than 1000 US investors about their views on the stock market and their portfolio makeup. The results are nothing short of shocking. While the bear market of 2007-2008 may not be seem as damaging on the charts, as we’ve observed several times, the effect of it on the psyche of the US investor has been simply devastating.
A majority (58%) have a negative view of the stock market, having “lost faith” in the market. No doubt, such jarring events like the “flash crash” last year are responsible for the perception that the stock market is no longer anything but a ‘rigged game’ (against retail investors).
Also astonishing, 44% say that they will never put new money into the stock market. If we look at the money flows (below), we see that this is no mere boast. US investors have by far preferred fixed income to equities for the past 28 months.
This is also reflected in the 61% that agree that “The principles of investment
diversification and asset allocation have changed”. And the shifts in portfolio allocation that have reduced “aggressive” portions to 37% from 46% and increased the conservative to 40% from 33%.
The Conference Board’s consumer confidence index fell to 60.8 – a six month low. The dramatic decline caught most prognosticators flat-footed. The reasons offered for the low confidence are the expensive gas prices that are squeezing discretionary spending, persistent unemployment, spiraling home prices and natural disasters that have plagued several US regions.
Mutual Fund Flows
According to ICI data, the past week brought another bought of withdrawals from equity mutual funds. US domestic funds lost $2.4 billion while foreign funds, which usually see inflows, lost $766 million.
According to data from Lipper FMI, the most recent week was almost neutral for equity mutual funds with inflows and outflows cancelling each other out. Emerging markets were the only bright spot receiving their 15th weekly consecutive inflow with $242 million.
For the month of May, the total withdrawn from domestic equity funds surged to more than $8 billion, the largest negative month since December 2010:
Fixed income funds in contrast receive the bulk of money from retail investors with an additional $4 billion going into taxable bonds according to ICI. Lipper FMI reported a more staid $1.4 billion of inflows for that category this past week.
Municipal Bond Flows
Municipal bond funds meanwhile continue to suffer from an exodus. Based on data from Lipper FMI, another $460 million exited that sector in spite of the positive performance of municipal bonds in general. This is the 29th consecutive week of muni outflows and brings the total to $34.5 billion lost (for weekly reported muni funds) and $48.8 billion (for weekly and monthly reported muni funds). Retail investors are ignoring the facts and acting on emotion and rumor – a clear case of ‘throwing out the baby with the bathwater’.
Gold recovered nicely in the past month but now sentiment gauges suggest that it will have difficulty in setting new highs. Not before it rests or corrects.
The average view of gold sentiment measures is not yet at an extreme but most are very close to reaching that level. One of them which is in the red line is the Bloomberg survey of insitutional traders. The four week average of the bull ratio is at 87% which is a multi-year high.
Another measure which just a few weeks ago signaled the coming recovery is the put call ratio of the SPDR Gold ETF (GLD):
From a peak of 1.13 in mid-May, the 10 day moving average of the put call ratio fell to 0.74 this Friday. Usually we tend to see peaks accompany put call ratios at 0.5 or lower so by the time the price of gold climbs to its previous highs, we may very well get there. By that time, I suspect other sentiment gauges will have also been pushed to the extreme as well.
The options market continues to be marginally supportive of higher stock market prices. The short term average of the equity only ISE Sentiment index finished the week at 181. Having almost twice as many calls as puts may seem high but on a relative basis it isn’t.
The short term average of the ISE index for all securities shows the supportive nature of the market much better:
The CBOE (10 day average) put call ratio was basically unchanged from a week ago at 0.644. At such a level, this put call ratio is showing a mild level of concern (or put activity).
The Nasdaq QQQ put call ratio continues to languish at the bottom of the chart, almost unchanged from last week at 1.44 and therefore supportive of higher prices.
The fly in the ointment continues to be the institutional favourite OEX option market which is once again dominated by put activity. Both the open interest and the put call ratio of volume are at elevated levels as they have been for some time.