Sentiment Overview: Week Of July 1st, 2011

Due to the shortened holiday week (July 1st, Canada Day & July 4th US Independence Day) I’ll be taking a long weekend so this week’s sentiment overview includes data as of Thursday. If material changes arrive on Friday I’ll update it to reflect that.

To my Canadian and US readers, have a great weekend celebrating your country’s founding! And remember to use a designated driver.

Sentiment Surveys
Retail investor sentiment according to the weekly AAII improved slightly along with the recovering stock market. The bullish grew slightly to 38.3% (from 37.5% last week) and the bears fell from 36% to 30% bringing the bull ratio up to 56%. This is normal behavior but of course, as contrarians, we’d prefer to see a bit more skepticism to cement the floor.

Investors Intelligence
Almost 40% of the stock market newsletter writers monitored by ChartCraft for their Advisor Sentiment index expect further price appreciation while 27% were still bearish. It would seem from the price action that the correction is over however at least from this indicator the recent retracement was a very shallow one compared to previous bull market corrections:

The four week moving average of the Investors Intelligence bull ratio (bullish % divided by the decideds) is still tracking downwards without having reached levels that have previously matched market bottoms. This is mainly because unlike other major corrections the number of bears didn’t rise above 28%. Normally we see 35-40% bears at intermediate market lows.

NAAIM Survey of Manager Sentiment
As with the other sentiment indicators, the NAAIM survey of manager sentiment increased slightly this week rising to 33% exposure from 29% a week earlier. Digging into the data a bit more we find that the most bearish response to the survey is a surprising 140% short position against the market. This suggests that there are still some who are skeptical and a few who are very much not believing in the bounce higher.

Hulbert Stock Newsletter Sentiment
The general Hulbert Stock Newsletter Sentiment index didn’t plumb the depths that we’d like to see for important cycle lows. When the average market timing newsletter editor suggests to their readers to short the market, at market bottom is close at hand. But this time they trimmed their portfolios to a 20% long allocation.

The more volatile Hulbert Nasdaq Newsletter Sentiment Index (HNNSI) did fall into negative territory. But even so, compared to itself, it failed to reach an extremely pessimistic level (at only -20.3%). Historically we have seen -60 to -65% as extreme.

Consumer Confidence
The Conference Board Consumer Confidence index fell to a 7 month low as the weak housing market, slow job recovery and the high prices of gas took their toll. I’m sure the European sovereign debt crisis which has brought the Greece riots to the front pages of newspapers and TV news hasn’t helped either.

The Confidence headline index decreased to 58.5, down from its recent peak in February of 72. The largest drop originated from the Expectations sub-index where it dropped to its lowest reading for the past 9 months.

Mutual Fund Money Flows
According to data from ICI, retail investors continue to exit equity mutual funds. This past week ended Wednesday, US domestic funds lost $4.2 billion. For the month of June investors have redeemed almost $18 billion from equity funds making it the worst month since May 2010:

Strangely enough, investors seem to be avoiding fixed income which used to be their favorite asset class. This week they’ve only added $1.48 billion when they would normally add between three to four times that. Likewise, they’ve also become neutral towards foreign equity funds, having added almost nothing for the whole month. From a contrarian perspective this is good news as the last time retail investors were avoiding foreign stocks was August 2010, just before the next leg higher.

The panic selling of junk bonds seems to have ebbed. The prior week saw $3.43 billion exit this risky asset class as concerns over Greece’s default took center stage. That was the largest weekly outflow since 1992 and was itself a ratcheting up of selling from the previous week when $1.62 billion was redeemed. This past week was still negative but more subdued with only $321 million flowing out of that asset class. This suggests that investors are slowly returning to accepting risk once again.

Municipal bond funds enjoyed their 7th consecutive positive weekly money flows with an additional $403 million entering the sector according to ICI data. Lipper FMI confirms the positive inflow but suggests $163 million in inflows.

Fixed Income
Sentiment towards US Treasury bonds is close to reaching a bullish extreme. The bond timers monitored by the Hulbert Bond Sentiment Index reached a recent peak of 46.1% (and have since declined to 35%). This means that the average bond timer was recently suggesting that their clients be long the bond market with 46% of their portfolio. That has historically corresponded with tops in long dated Treasuries.

As well, Consensus bullish percent for Treasury bonds hit 56%. That’s down 2% from last week and very close to the levels that have marked major tops (70% area). So we do have some significant reasons to be leery of bonds here.

Corporate Insider Transactions
According to data from Reuters, corporate insider transactions are supportive of higher stock market prices:

There is usually a lag of at least 6-8 weeks built into this indicator. But given that leeway, it is a fairly good guide to inflection points. The most recent warning which every student of the market should have seen from a mile away was the large selling spike in late April which corresponded to the market top.

Option Sentiment
The ISE sentiment index averaged 178 calls for every 100 puts over the past week. At this point it is difficult to glean an edge from it, except from the earlier signal when the 5 day moving average fell to the lowest since last summer’s correction. For the chart, see the sentiment overview for June 17th.

The CBOE equity only put call ratio reflects the shift towards calls as traders attempt to take advantage of the bounce higher. The 10 day moving average has fallen to 0.64 from its recent high of 0.89 on June 17th. The normalized put call ratio has also collapsed utterly:

As well, the sudden shift in the Nasdaq 100 ETF (QQQ) also grabbed my attention. The traders, like the S&P 100 index option traders, are best taken at face value. And right now they have shifted to trading quite a few calls relative to puts:

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