Below is this week’s summary of sentiment happenings:
The stock market rebound that arrived earlier in the week was enough to put some wind in the sails of the retail US investor. The AAII weekly sentiment survey showed an increase in the bullish camp to 37.5% and a retreat in bearishness to just 35.7%. So once again, we have more bulls than bears – something we hadn’t seen since late April.
In the end, the short term average of the AAII bull ratio is little changed and still at contrarian bullish levels:
I would have preferred to see sentiment stubbornly bearish in the face of the recent price gains. But keep in mind that the survey was taken on Wednesday – the best day of the week. We’ll have to wait for next week’s survey results to see how they react to the price declines that occurred in the last half of this week.
As well, the Farrell Sentiment Index (not shown) which takes into account half of the ‘neutral’ respondents has provided a buy signal by rising from below 0.50 and crossing higher.
Investors Intelligence Advisory Sentiment index, ChartCraft’s measure of newsletter sentiment, showed a smidgen more bearishness this week. The bulls increased to 37.6% (from 37%) and the bears to 28% (from 26%). Overall, very little was changed in the general state of this indicator. We’ve seen a decline but not one that is significant enough to match previous correction lows.
NAAIM Survey of Manager Sentiment
The headline numbers for this survey increased slightly from last week. The average market exposure inched higher to 29% from 26%. But what I want to bring to your attention more than that is the difference between the most bullish responders to the poll and the most bearish. This ‘Polarity’ is now declining rapidly after reaching a new record in late April:
When this indicator is high it reflects the fact that those who are most bullish are over-the-top excited about the market and maximum long while those who were the most bearish weren’t really bearish at all. And when it is scraping the bottom of the chart, it means that the portion of survey responders who were the most bearish were extremely bearish while even the most bullish responders were just mildly long.
The Consensus bullish percentage continues to decline as it has for the past few months. This week it fell to 46% (from 50% last week). Ideally I’d like to see it fall to 30% or lower because that is the area that has tended to match up with major market lows.
Hulbert Stock Newsletter Sentiment
This measure of newsletter sentiment shows the average market timing stock market newsletter recommending less than 20% long exposure. That is a decline of more than 45% percentage points.
While this is where the market found its footing previously in mid-March, it is still a shallow correction within a wider historical context. Usually significant lows are made when the HSNSI falls to negative (meaning a suggested short exposure to the market).
The TSP survey this week fell to an even more bearish posture with 59% expecting lower prices and just 31% expecting higher ones. The bull ratio declined to 34%, the lowest since August 2010.
The 4 week average of the TSP bull ratio (shown above) has also declined to levels that would suggest a significant low is in order.
Bear Market or Correction?
Mark Hulbert provides further insight by looking at the pattern of various sentiment surveys 52 trading days after a peak to see if we are entering a new bear market instead of a correction. The results are inconclusive.
Mutual Fund Flows
The selling that we observed last week intensified across most asset classes. According to Lipper FMI data, US domestic mutual funds saw net redemptions of $1.2 billion (about half compared to last week). ICI data in contrast showed an increase in redemptions reaching $6.8 billion (on top of the $5.4 billion from last week). Even with one week remaining to be accounted for, we have already easily surpassed the total outflows in May.
So far this month more than $13.4 million has exited domestic US funds. At this trend, June will be the worst month for domestic equity flows since August 2010. Since the start of 2007 investors have withdrawn more than $338 billion from the US stock market – a new record thank to this week’s data.
Even fixed income which had been the favorite among retail investors for a long time saw a decrease of inflows. Based on data from ICI, taxable bond funds has less than half the flows compared to last week ($2.4 billion). According to Lipper FMI, bond funds received even less, $707 million for the week. Even so, the cumulative asset flows into bond funds since 2007 reached a new record ($816 billion).
The corporate high yield sector which is a useful weather vane of risk appetites and market sentiment lost $2.9 billion for the week ended Wednesday, according to Lipper FMI. That is the largest outflow going back to 1992. The second largest weekly outflow was $2.55 billion in August 2003 – this was the beginning of the end of the 2000 bear market.
You’ll no doubt recall from last week’s Sentiment Overview that junk bonds saw heavy outflows then. In fact all of June has been a terrible month for junk bonds. But this week really takes the cake.
Municipal funds on the other hand had another week of inflows, albeit a very modest one at $129 million based on Lipper FMI data. Almost all of that was to the high yield municipal funds sector. According to ICI this is the 6th consecutive positive inflow for municipal bond funds. Recent commentary from Cumberland Advisors:
The overall improvement in municipal finances has also contributed to improvement in the market. State and local governments (in total) are heading toward the sixth quarter in a row of RISING tax receipts. Also, problems in the pension area, which have gotten widespread press coverage, have started to be addressed. We expect this trend to continue.
The selling has abated in the municipal fund arena. Though most weeks have seen outflows, they are much smaller, and there were actually inflows a couple of weeks. Part of this is just the normal abatement of pressures, but it is also the recognition, even among retail investors, that things had really reached a point where the market was severely oversold.
ETF Fund Flows
Turning over to the ETF universe, we see the same trends reflected in the data. According to Lipper FMI fund flow data, junk bond ETFs lost $484.2 million for the week ended Wednesday – a new record. Two major ETFs accounted for the bulk of the outflow: iShares iBoxx High Yield Corporate Bond (HYG) lost $269 million and the SPDR Barclays High Yield Bond (JNK) suffered $245.3 million in redemptions.
The largest equity ETF, the SPDR S&P 500 (SPY), also had the largest net outflow for the week ($1.7 billion) followed by the SPDR Select Sector Financial (XLF) which had $378 million in net outflows. Even foreign equities and emerging markets were not immune. The iShares MSCI EAFE ETF (EFA) lost $748.8 million. About the only sector to see positive flows was municipal ETFs but even then the numbers were very small.
With the exception of the decrease in the Rydex Precious Metals fund assets, there is little to warrant our real interest in gold (for chart see last week’s Sentiment Overview). For now the market seems mired in cross currents that will probably leave it chopping within a range or declining mildly. The various sentiment surveys are not providing an edge with the consensus being mildly bearish.
The ISE Sentiment index was almost unchanged this week with the 10 day moving average of the equity only call put ratio closing at 165 this week. The 5 day moving average meanwhile has started to climb back up from its recent low:
The CBOE options market has also quickly climbed aboard the bullish bandwagon with the first 3 days of the week delivering put call ratios less than 0.60 – this after last week where we had 3 back to back days of put call ratios above 1.
The institutional option traders meanwhile are reducing their short bias. The S&P 100 index (OEX) put call ratio has fallen again this week. The open interest put call ratio is down to the lowest levels since early April 2011.
The Nasdaq 100 ETF (QQQQ) put call ratio is once again curling down. This option market, like the OEX one, is taken at face value so this decline suggest that we are about to see another attempt to bottom – perhaps at a slightly lower price point than the previous one: