Overly Optimistic Stock Market Sentiment Flashes
By The Curmudgeon
The CURMUDGEON has not been bullish on the 2013 stock
market, despite the explosive rally the first two weeks of this
year. We believe that all the good news is in the market and that
recent bullish optimism indicates a stock market top is near.
As per previous posts, we've been skeptical of the November
2012 to January 2013 rally because:
1. We thought the fiscal cliff deal had already been factored
into U.S. stock prices. This despite the fact that none of the
real budget deficit and debt ceiling problems have been solved and have been
once again "kicked down the road."
2. Earnings momentum has been declining for over 1 year now,
while the ratio of U.S corporate earnings to GDP is at an all-time high.
3. There's way too much investor complacency, as indicated by
5 year low on the VIX. Also, analysts interviewed by Barronís are
universally bullish as is the current sentiment readings.
In particular, we cite the following evidence of bullish
sentiment and complacency:
- Investors Intelligence
U.S. Advisor Bullish percentage has increased to 51.1% on Jan 9th vs.
37.2% on Nov 21st
- AAII Investor Sentiment
Survey indicates 46.4% of investors were bullish as of Jan 9th.
That was up 7.7% on the week and significantly above the long term
average reading of 39.0%
- The current Consensus
Bullish Sentiment 51% vs. 45% 2 weeks ago.
- Market Vane's Bullish
Consensus of future's traders is at 66% - not too far from its October
2007 all-time high of 71, which coincided with the previous bull market
- Investors have been
piling into U.S. stocks at near record pace to start 2013. The
latest Bank of America Merrill Lynch Global Research report shows a $19
billion inflow into U.S. equity funds for the first full week of
2013. Thatís the biggest surge since June of 2008 and the
fourth highest since 2000, according to the report. Equities have seen
inflows over the past 7 weeks, according to the report.
- According to Lipper,
equity funds, including exchange-traded funds, took in $18.3 billion for
the week ended Jan. 9th. That was the fourth largest net inflows
since Lipper began calculating weekly flows in January 1992. Some $10.8
billion poured into equity ETFs, while mutual funds took in more than $7.5
billion, their largest inflow since the week ended May 2, 2001.
- The Rydex Ratio
(calculated by dividing total Money Market plus Bear Assets by total Bull
assets in the Rydex mutual fund group) currently is at the extreme bullish
end of the normal range as shown in this chart:
- It's important to note
that total Rydex bear fund assets have fallen to levels not seen since the
1998 market top, showing that the bears are unusually timid.
- Meanwhile, Rydex money
fund assets are dropping to levels frequently associated with stock market
tops. Sideline cash is getting very low at Rydex, which implies investors
are already invested in bullish stock mutual funds.
Sentiment alone is insufficient to call a market top, but it
is definitely a warning sign. Historical high readings of
bullish sentiment almost always indicated a major stock market top was at
hand. Caveat emptor!
Until next time...........................................
Curmudgeon is a retired investment professional. He has been
involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.