Below is the summary of sentiment data for the financial markets:
Even though the S&P 500 index was slightly lower, the weekly survey of retail US investors was more optimistic this week than last. This is surprising since we usually see sentiment reflect market moves. Those expecting stock prices to be higher in 6 months rose to 29% (from 24.4%) while the bears decreased to 43% from 48%. The change was small but enough to push the bull ratio up to 40% from 34%.
This is 43% the average bull ratio and therefore still a very low level of optimism overall. The four week moving average of the bull ratio was basically unchanged and the lowest since late July 2010. For the chart, see last week’s sentiment overview.
The story remains the same with this indicator. Just as last week optimism is waning but there are still far too many newsletters who believe the current market weakness is merely a ‘correction’. While the bulls have receded from a peak of 57% in April to 37% this week, the bears are still too few in number at 26% to provide a meaningful signal.
Sentiment & Market Tops
Mark Hulbert wrote an interesting article earlier in the week in Barron’s: “Is the Bull Market Over?“. He looks at the behavior of the sentiment surveys mentioned here (Investors Intelligence, Hulbert Newsletter Sentiment, and AAII) and compares their pattern at major market tops.
His conclusion is that these sentiment surveys are coincident indicators. Based on this he suggests several ways that we can check to see if a recent top (such as the one we’ve just had) is the end of a bull market. One way to tell is if the peak in sentiment and the peak in stock market prices are separated by more than a few months. In such a case a major top is unlikely.
Another way to confirm a major top is to check if sentiment has reached historically extreme levels. If instead sentiment indicators have peaked at lower levels then a major market top is unlikely. Based on these two key variables, Hulbert concludes that we can’t rule out that the May top will mark a ceiling for prices for some time.
It has been a while since we checked in on this retail investor sentiment survey. The most recent one conducted yesterday shows the majority (56%) expecting lower prices. Only 33% of those surveyed are bullish. The bull ratio stands at 37% which is contrarian bullish. At the mid-March lows the bull ratio was at this same level.
Much like other sentiment indicators, the Consensus Bullish Sentiment Index is declining from a recent peak above 75% in February 2011. The extremes for Consensus are 75% (bullish) and 25% bearish. The current level of 50% is smack-dab in the middle of those two extremes and as such doesn’t provide us with a real edge.
NAAIM Survey of Manager Sentiment
We’ve been watching this sentiment survey drop since it peaked at 97% in February of this year. With this week’s result it is finally approaching extreme levels that have corresponded to important market lows in the past.
The median NAAIM market exposure this week was just 25% while the average was slightly higher at 26%:
Keep in mind that usually sentiment measures don’t usually get as pessimistic during bull markets as they do during bear market cycles. The current NAAIM (median) is exactly where last year’s summer retracement ended. It fell to 27.5% in June and again to 25% in July.
Merrill Lynch Survey of Hedge Fund Managers
The most recent monthly survey conducted between June 3rd and June 9th covered 282 managers who oversee a total of $828 billion of assets. The results show that overall investors are reducing their risk profile and increasing allocations to cash and bonds.
Not surprisingly, the EU’s sovereign debt crisis continues to be at the forefront of hedge fund manager’s worries. All other concerns are distant to the European debt concerns: 43% of fund managers believe it to be the biggest ‘tail risk’ up from 36% in May.
The net percentage overweight equities fell from 41% in May to just 27% in June. Europe lead the exodus with the percentage of investors underweight European markets increasing to 15% from 1% in May. The proportion of investors overweight commodities fell to a net 6% from 12% in May.
Paring equity and commodity exposure, hedge fund managers moved assets to cash which surged to an 18% overweight (from just 6% in May). This is the largest overweight since June 2010. The shift also saw bonds, an asset class which has been in disfavor for a long time, gain some new interest. Fixed income underweight moved from 58% in April, 44% in May to 35% in June.
According to Michael Hartnett, chief global equity strategist at Merrill Lynch Global Research, “Investor capitulation from risk assets is not yet visible despite higher cash levels and defensive rotation. Fears on global growth will need to rise further before hopes for QE3 can begin to be priced in.”
Here’s a chart showing the net allocation to US equities:
Here’s a chart showing the net allocation to European equities:
The TrimTabs/BarclayHedge Survey for May shows that while the stock market weakened, the institutional managers polled slightly increased their bullishness compared to April (30.1% from 23.5%) while those expecting weaker prices fell from 34.1% to 28.8%. Add to that a whopping 34% who are increasing their leverage and the fact that margin debt is the highest since February 2008 and we have a very aggressive outlook from this indicator.
This is quite a contrast to the survey’s results one year ago when we saw just 18% bulls and 52.3% bears. The stubborn level of bullishness then is a bit worrying. But before we get too carried away, it is important to remember that there is considerable lag built into this indicator so the data we are seeing is already stale.
Their skepticism towards bonds continue to persist. The last time the bulls outnumbered the bears in fixed income (10 year US Treasuries) was in August 2010. But hedge fund managers were once again bullish on the US dollar (30.6% compared to 27.7% in April).
The firm of TrimTabs itself is taking a cautious stance and reducing its market exposure to zero from 50% exposure. TrimTabs’ reasoning is that the end of QE2 to spell the end of the ‘propping up of the market’. While certainly understandable, this is information that is all too well known and already priced into the market. They go on to write to their clients that the “S&P 500 is down 6.8% from its interim closing high on April 29, and we expect market action to get even uglier this summer.” Their terrible track record makes it tempting to fade them here.
After increasing the rate of their selling last week, corporate insiders made an abrupt about turn. Data for the week ended last Friday shows that they reduced their selling (-32%) and increased their buying (-33%). According to data compiled by Vickers Weekly Insider Report the fact that they curtailed their selling implies that they believe that their stock prices will rise soon. Had they instead continued selling at the same or faster pace, that would have been an ominous sign for the market. The ratio is now at its most bullish since September 2010. For more see: Insiders turn back from the brink.
Insider data from Thomson Reuters shows a similar pattern:
Mutual Fund Flows
According to data from Lipper FMI for the week ended June 15th, domestic mutual funds had a massive net withdrawal of $2.4 billion. This is the largest weekly net outflow since September 2010. ICI reports an even larger amount leaving US domestic mutual funds: $5.5 billion. This is one of the largest weekly outflows I’ve seen in some time! At this rate we will easily surpass the net redemption total from last month. In the first two weeks there have been $6.5 billion withdrawn from domestic equity funds compared to $8.6 billion in all of May.
Below is a chart showing the 4 week moving average of all equity fund flows (based on data from Lipper FMI). The current data is the worst showing since September 2010.
Lipper FMI reports that fixed income received another $1.8 billion. This is the 26th consecutive weekly inflow for the asset class but it is a bit light compared to previous weeks. But the corporate high yield sector which actually is correlated with the equity market saw a net withdrawals of $1.3 billion for the week. This is the largest weekly redemption since May 2010 (when the sector lost $1.7 billion). According to the Merrill Lynch High Yield Master II index, junk bonds were priced at 102.2 yielding 7.31% – 565 basis points above Treasury bills.
ICI reports fixed income mutual funds receiving inflows of $5.1 billion for the week ended June 15th. Fixed income is on such a tear that the cumulative total since 2007 has now reached a new high ($813 billion). Meanwhile, the cumulative total for domestic equity mutual funds has sunk close to its previous low (-$331 billion).
Municipal bonds suffered yet another negative week of flows as $175 million left the sector. So we return to the negative after just one week of positive flows had broken the 29 consecutive negative streak before it. The outflow is surprising since the municipal bond market itself is continuing to perform well with its 11th consecutive positive weekly return. In contrast, ICI reports net inflows of almost $300 million for this sector.
The IPO market continues to expand with new offerings hitting exchanges on a daily basis. One of the more prominent technology IPOs this week was Pandora Media (P) which priced at $16 and enjoyed a one day pop but since then has deflated precipitously. This has been the fate of several IPOS, including the high profile LinkedIn (LNKD) which has lost about 30% so far. So far this year we’ve had 138 filings and 74 pricings, slightly ahead of 2010. While the renewed interest and activity in the IPO market is indicative of a more risk tolerant investor, it is difficult to disparage it with the monicker of a bubble, especially if we compare it to the 1999 extravaganza.
Among the multiple indicators that I monitor for gold, there really isn’t a clear consensus. Most of the noteworthy measures of gold sentiment are lukewarm or still too optimistic. The one glaring exception is the behavior of the Rydex traders.
The Rydex Precious Metal sector mutual fund has seen a major exodus pushing its total assets down to $134.6 million. Historically, this much loathing has been a reliable indicator of an important low for gold:
Every once in a while it pays to check in with the ‘grey beards’ – this is the name I give to experienced and successful professional investors. Among this select group is Steve Leuthold of the Leuthold Group. He shared his insight in an interview with Bloomberg TV yesterday.
Leuthold mentions that the sell-off was not a surprise to him since he expected the highs for the year to arrive in the first half. He believes that the peak in April will remain for the rest of 2011. Leuthold’s models are showing a median valuation for the S&P 500 bellwether index.
More interesting he says “This isn’t any time to sell”. He expects a significant rally point because the market has gone too far too fast and it is oversold. Even so he only has a 60% equity allocation in his mutual funds and in his partnership 35% (before he removes hedges). Leuthold prefers investing outside the US, especially Asia.
The 10 day moving average of the equity only ISE call put ratio fell to 163 as of today’s close. That is the lowest level since August 2010. The 5 day moving average fell to just 146 which is the lowest since early July, when the S&P 500 index found support after last summer’s correction:
This week the CBOE equity only put call ratio had 3 back to back days above 1 taking the 10 day average to 0.895. To find a higher level we’d have to go back the dark days of February 2009. As I mentioned earlier in the week, we haven’t seen this much fear in option traders since the bear market bottom. The normalized put call ratio jumped to close the week at 1.45 – a multi-year high.
The OEX option indicator that I’ve mentioned over and over again has started to recede. The ample signals that it provided through the volume and the open interest put call ratios were legitimate. From March 2011 it had telegraphed a very serious warning signal. Those that heeded it were protected from the market weakness that followed.
Now it seems these same institutional ‘smart money’ traders are backing away slowly from the massive short position that they have built up. The open interest put call ratio is lethargically dropping and the volume put call ratio has fallen from its recent peak at 2.12 to just 1.55 – the lowest since February 2011.