Sentiment Overview: Week Of June 10th, 2011

Here’s this week’s sentiment summary:

Sentiment Surveys
Retail investors in the US continued to become more bearish this week. Only 24% expected higher stock prices while 48% think prices will weaken in the next 6 months. Since late December 2010, we’ve seen bearishness rise by a factor of more than 2.5 times. The four week moving average of the AAII bull ratio is now down to almost the same level as the trough of last year’s correction.

It is important to remember that different sentiment conditions arise during different market conditions. Considering that the 2008 bear market conditions were extreme and that
if bull market conditions still apply, this is a significant contrarian signal. We should expect a low here based on a washout in sentiment.

During the bear market, stock prices become much more ‘oversold’ in order to attract strong-hands (red arrows). But during bull market conditions, important lows occurred at this relatively modest level of gloom (green arrows).

Investors Intelligence
ChartCraft’s II Advisor Sentiment index is also showing an amelioration in the bullishness extreme that we saw recently. The bulls decreased to 41% while the bears reached a 10 weak high of 23%. At a bull bear ratio of 1.8:1 this sentiment gauge of newsletter editors is still far from providing a contrarian signal. Usually we expect to see market lows accompany ratios of 1:1 or lower.

While a significant portion of newsletter writers have defected from the bullish camp, we are still not seeing enough of them becoming outright bearish. A large portion of them (36.5%) believe this is merely a “correction”.

NAAIM Survey of Manager Sentiment
Active money managers polled in this weekly survey have dramatically reduced their equity exposures. The average portfolio is long equities with 42% while the median is 50%. This is approximately half compared to February 2011:

Market Vane Bullish Consensus
This survey is an aggregation of various CTA’s and institutional market timing advisors. It fell 9% points to 50% – from a cycle high of 67% in February. Last summer’s trough corresponded to 40% in this metric and the bear market low to the low 30’s%.

Fund flows – TrimTabs

Fund Flow Data
Retail investors were shaken by the recent market weakness and sold accordingly. According to Lipper FMI, in the most recent week domestic mutual funds saw net outflows of $1.311 billion. The four week rolling average is -$448 million, the worst since mid-October 2010 (for more, see chart below).

Domestic equity ETFs saw an even larger exodus this past week with redemptions of $4.5 billion. The gargantuan SPDR S&P 500 ETF (SPY) was responsible for more than half of that ($2.5 billion) total. According to ICI, dometic mutual funds had outflows of a little over $1 billion for the week of June 1st.

TrimTab’s recent weekly fund flows reports is skeptical that the recent weakness is the start of the end for the aging cyclical bull market. They note that losing streaks like the one’s we’ve seen are not rare and tend to be followed by a modest reversion to the mean. More significantly, retail investors who are notoriously bad market timers are loading up on leveraged short ETFs. According to TrimTabs, since the beginning of May they have also withdrawn almost $19 billion, the largest net amount since August 2010.

Foreign equity funds also saw withdrawals, losing another $300 million, cancelling last weeks’ positive flows of approximately the same magnitude.

Emerging market funds however continued to see small but positive inflows of $243 million bringing us to the 16th weekly positive flow for that sector.

Fixed income, as we’ve come to expect, tacked on another $3.8 billion of new money (according to data from Lipper FMI). The rolling 4 week average is slightly above $3 billion. There was an additional $800 postiive inflows into this sector via fixed income ETFs.

Municipal Fund Flows
According to data from Lipper FMI, municipal bond funds finally were given a reprieve as they gained $246 million of new money from investors. This breaks the 29 week losing streak and presents the first glimmer that retail investors are realizing the world is not about to end. It only took 10 consecutive weeks of positive muni-bond performance to get them to notice this.

Based on data from ICI meanwhile, the most recent week is the fourth consecutive showing very small but positive flows for municipal bond funds (an average of $35 million).

Meredith Whitney was back on CNBC being interviewed with much more skepticism than other appearances. The recovering municipal bond market is making even the CNBC reporters wonder about her judgement. You can watch the video here. Also notice how she manages to avoid any sort of specifics at all costs.

Gold Sentiment
In last week’s sentiment overview I suggested that gold would have a tough time in continuing to rally (and setting new highs). This week’s action seems to confirm that since gold traded listlessly. Today gold suffered the largest single day drop in a month falling to $1526.

Recent readings suggest that is to continue for now. I don’t see any good reason from the usual motley collection of gold indicators to suggest that we’re going to see a strong move in either direction. Most are stuck somewhere in a ‘no man’s land’ of mediocrity.

Take for example, the Hulbert Gold Newsletter Sentiment index. The HGNSI has dropped from a high of almost 74% in early May to just 20% this week (the lowest reading was in mid-May at 7% during this period). Usually we see a major trough for gold accompany negative readings from the HGNSI. That is, when the average gold newsletter is suggesting to their clients to actually short gold, it is time to buy gold. That isn’t the case now.

US Dollar
Just as we thought the beleaguered US dollar was getting a break and managing to carve out a major low, things turned sour. And now we seem to be see-sawing. US dollar sentiment indicators have once again dropped but are still above the May lows.

According to DailyFX’s Speculative Sentiment Index (SSI):

The euro’s bounce from recent lows has mostly been met with aggressive retail crowd selling, giving contrarian signal that the pair could continue its recent advance and move towards multi-year highs. Our SSI ratio stands at -1.26, which signals that 56 percent of traders are short and have mostly been selling.

Yet this is a moderation from just yesterday when approximately 59 percent of traders were short. Long positions are nearly 10 percent higher than yesterday and up 8.3 percent on a week-over-week basis, while shorts are roughly unchanged from yesterday yet 7.4 percent weaker since last week.

The key question is whether we continue to see retail crowd selling at these levels. The net-short ratio gives us a modestly bullish contrarian bias, but we would ideally see further sentiment extremes before taking a stronger stance on the EURUSD.

Option Sentiment
The ISE sentiment index is where we left it last week. The equity only put call ratio (10 day moving average) was almost unchanged at 181. If we include ETFs and index options, the picture looks much more bullish (from a contrarian perspective) as the ‘All Securities’ sub-index is at 100 – close to the lows in its history.

The CBOE equity only put call ratio meanwhile reflected a major push into put activity this week. The short term average of the ratio jumped 0.76 (from 0.64 last week). This is the highest since last summer’s correction:

Other option sentiment measures are also supportive of higher stock prices and suggest that we are at or close to an inflection point. Retail (small) option traders who have a poor track record of timing the market are loading up on puts relative to calls.

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