Some Investor Sentiment Gauges Reach Panic Levels

For the fourth time since October 2014, the S&P 500 is testing the mid-1,800s.

That’s right about where investors threw in the towel before, and with regret watched the S&P move higher.

Will it be the same this time around?

The chart below plots the S&P 500 against the CBOE Equity put/call ratio, the percentage of bullish advisors and newsletter-writing colleagues polled by Investors Intelligence (II), and the percentage of bullish retail investors (polled by the American Association for Individual Investors – AAII).

As a composite, those three groups are about as bearish as they were near prior S&P lows. In fact, the CBOE Equity put/call ratio soared to a multi-year high on Friday, and the percentage of bullish investors is at a 10-year low.

Investor sentiment suggests that stocks are ripe for a rally, but this would be the fourth time the S&P is following the same script (bounce in the 1,800s). Is it time for a curveball?

The January 19 Profit Radar Report warned that a break below support at 1,870 would result in a quick drop to 1,820 and provided a long-term perspective on the S&P 500 (has a major market top been struck or not?) along with a short-term forecast.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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Retail Investors Scared of Market Selloff

Retail investors do not like stocks right now. Only 21.11% of retail investors are bullish (based on the latest survey by the American Association for Individual Investors – AAII.

I’m not a big fan of the AAII poll (the results are rather temperamental), but the poll has persistently shown an unusually large measure of pessimism for months.

Retail investor sentiment started to sour in late 2014, even though the S&P 500 eked out a few more all-time highs in 2015.

The S&P is still within a few percent of its all-time highs, but AAII sentiment is at panic levels.

Broad excessive bearish tends to limit down side risk and increase the odds of further up side.

I wouldn’t recommend trading based on the results of this temperamental sentiment gauge, but I will carefully monitor other sentiment indicators to discern if pessimism is engrained deep enough to move stocks higher.

The Profit Radar Report consistently monitors dozens of sentiment indicators.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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2011 vs 2015 – Sentiment Comparison

Over the past two weeks we explored two developments:

  1. Stocks had to rally to flush out premature bears
  2. 2015 is looking a lot like 2011

A couple of sentiment indicators (such as AAII poll) showed extreme pessimism recently.

2011 saw an 18% drop starting in July.

The question for right now is this: Is there too much pessimism for a summer correction?

The first chart shows sentiment in 2011. The gray bar highlights June 2011.

By mid-June, investors polled by the American Association for Individual Investors (AAII) and Investors Intelligence (II) had become quite pessimistic. Only 24% and 37% of investors were bullish.

A 7.8% S&P 500 (NYSEArca: SPY) rally from June 16 – July 7 relieved much of that pessimism, but it didn’t take a spike into extreme optimism for stocks to plunge in July.

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A look at current sentiment shows a similar scenario.

Optimism was quite low (extremely low for the AAII survey), but recovered, no doubt due to the 58-point rally from the June 15 low.

Based on the 2011 analogy, stocks may rally into early July. An updated look at the 2011 vs 2015 analogy is available here: 2015 is Looking a Lot Like 2011

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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Has the Market Fooled Enough Bears to Tank?

By some measures, investor sentiment turned extremely bearish last week.

Only 20% of retail investors surveyed by the American Association for Individual Investors (AAII) were bullish on stocks, the lowest level since April 2013.

Headlines like the following dominated financial news sites:

  • “Wedbush: Stock market is at major top” – Yahoo!Finance
  • “Stockman: Stocks and bonds will crash soon” – Yahoo!Finance
  • “Low VIX points to tumble ahead for stocks: UBS” – Barron’s
  • “Irrational exuberance is dooming the stock market” – MarketWatch
  • “Beware: Bull market flashing warning signs” – CNBC
  • “S&P 500 rally thins and it’s worrying market analysts” – Bloomberg
  • “Why you should care that Robert Prechter is warning of a ‘sharp collapse’ in stocks” – MarketWatch

The June 10 Profit Radar Report commented regarding those developments (and especially the last two headlines):

Prechter has predicted a sharp collapse literally every single month since late 2009, and it’s unlikely to occur when you see it featured on the Yahoo!Finance homepage.

We’ve been watching the rally thin and become narrower since April, but when the media starts to pick up on such nuances, the information usually isn’t worth too much anymore (an interesting bullish twist of this thinning market was discussed in this June 9 article).

There appear to be too many bears out there right now to send stocks significantly lower. A push to 2,140+ may be needed to flush them out.”

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Perhaps somewhat anecdotally, but nevertheless telling, my article titled “Will the market rally to flush out a horde of premature bears?” (published on July 12 on MarketWatch) got very little attention. It just wasn’t bearish enough to attract attention.

Two of my other articles (with neutral or somewhat bullish titles) on the other hand quickly made it into the top 5 most popular article list at MarketWatch.

I’m no genius, but I’m learning that the market is highly unlikely to crash when everyone expects it. A watched pot doesn’t boil.

After all, this is not the first time we’ve been there. I.e. Sep 18, 2013: Who or what can kill this QE bull Market? or July 25, 2014: Bears cry wolf – Everyone wants to be the next Roubini.

The 4-day, 50-point S&P 500 rally has no doubt caused an uncomfortable squeeze for committed bears. I would like to see additional gains, which would likely set up a nice opportunity to short the S&P 500 into July/August.

This opportunity will likely come at a time when fewer people expect it.

A recent article highlighted the similarities between 2011 and 2015 (2011 saw a 20% summer meltdown). Sunday’s Profit Radar Report featured a revealing investor sentiment comparison between June 2011 and June 2015.

You may access this comparison instantly here. It may also be the topic of an article for next week.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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Stock Market Money Flow Check

Every once and a while it’s a good idea to check equity money flows, kind of like a GPS for what the money is doing.

Here’s a series of three charts to help us do just that.

1) Asset Allocation

In March, exposure to stocks (according to the American Association for Individual Investors asset allocation survey) soared to the highest level since the 2007 financial crisis.

This sounds scary, but the long-term asset allocation chart helps put things into perspective. Leading up to the 2000 market top, investors had up to 77% of their portfolio in stocks, and up to 69% in 2007.

2) Commercial Traders

The chart below shows the net S&P 500 e-mini futures contracts held by commercial traders. On balance, commercial traders are more or less neutral.

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3) VIX, Put/Call Ratio, SKEW

Chart #3 plots the S&P 500 against three different sentiment indicators:

  • CBOE SKEW: The SKEW was designed to measure the risk of a ‘Black Swan’ event. Higher SKEW = higher risk.
  • CBOE Equity Put/Call Ratio: This ratio shows to what extent option traders favor call options over put option. Lower readings = more optimism = more risk.
  • CBOE Volatility Index (VIX): The mix shows the market’s expectation of 30-day volatility. Lower VIX = Elevated risk. The VIX has lost much of its contrarian indicator mojo starting in 2012.

The CBOE SKEW (5-day SMA to smooth out daily swings) is near the lower end of a two-year range.

The CBOE equity put/call ratio dropped to 0.46 yesterday, a 1-year low. The 5-day SMA is not as low, but still at the lower end of an eight-month range.

The VIX is back to what used to be considered the ‘danger zone.’

Summary:

Money is flowing into equities, but there are no screaming investor sentiment extremes. Anyone claiming that stocks will crash because any one single sentiment gauge is at financial crisis levels is taking things out of context.

Detailed investor sentiment analysis is available to Profit Radar Report subscribers.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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Can We Still Trust the Investors Intelligence Sentiment Poll?

Doing the same thing over and over again, but expecting a different outcome is often considered insanity.

By that definition, some analysts are legitimately insane. Why?

Because they’ve doomed the stock market based on bullish investor sentiment, and have been doing so for many months, even years.

You will see what I mean upon further inspection of the chart below.

Since late 2013, the Investors Intelligence (II) survey of advisors and newsletter writers has shown (extreme) bullish sentiment.

Illustrated via the chart is the percentage of bearish advisors. This percentage has been around 14 since late 2013, which happens to be the lowest since 1987.

And since late 2013 (and way before that), Elliott Wave International (one of many market forecasting services that’s been spreading doom and gloom) has been warning that a 2008-like meltdown is directly ahead.

The cold fact is that the S&P 500 has tagged on another 20%+ since 2013.

This is not the data’s fault. It’s the interpreter’s fault … and an unfortunate symptom of tunnel vision. Perhaps the II poll has just become too popular to be effective as contrarian indicator, and lost its mojo.

II is not the only sentiment data available, and it’s the analyst’s responsibility to determine the validity of the II survey in context with other sentiment data. Now more than ever, it’s important to widen the horizon and look at other sentiment gauges.

The Profit Radar Report monitors dozens of sentiment indicators and consistently publishes at least six every month.

For example, the February 19 Profit Radar Report Sentiment Picture summed things up as follows: “In short, sentiment is elevated, and may be a short-term drag, but is not indicative of a major market top.”

Throughout 2013 and 2014, the Profit Radar Report pointed out the lack of excessive optimism and likelihood of higher stock price (click here for a more complete record or the 2014 sentiment analysis).

Here is a look at the latest Sentiment Picture, published on May 29.

The two charts categorize various sentiment gauges as either opinion poll (what investors say) or money flow (what investors do).

The American Association for Individual Investors (AAII) and National Association of Active Investment Managers (NAAIM) opinion surveys do not confirm the bullish (bearish for stocks) tone of the Investors Intelligence poll.

Three other sentiment gauges more closely related to actual money flow do not show any real extremes.

What’s the moral of the story?

Don’t trust fear mongers or ‘one trick pony’ predictions based on any single sentiment gauge.

We live in a complex world. We need complex analysis.

Oh, on by the way, purely based on sentiment, stocks could continue to grind higher.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Investors are Record Neutral on Stocks

The latest American Association for Individual Investors (AAII) poll showed that 49.79% of investors are neither bullish nor bearish.

This is the highest neutral reading since June 2003.

Considering that the S&P 500 (NYSEArca: SPY) is trading at all-time highs, that’s quite remarkable. Is this bullish or bearish?

The chart below plots the S&P 500 against the percentage of neutral AAII investors, and marks similar prior readings.

It’s always tough to stuff a few decades of history into one chart, but extreme levels of apathy are usually shown after some sort of correction.

The AAII poll is one of the more noisy sentiment indicators, and I never put too much weight on it.

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When viewed in isolation, and considering that the percentage of bullish investors is also at a 2-year low, the AAII poll results are more bullish than bearish.

Three similarly unusual sentiment readings in early May prompted the May 10 Profit Radar Report to make this comment: “The above-mentioned sentiment readings are contrary to seasonality and breadth. Nevertheless, they increase the odds of a breakout to new highs.”

The S&P 500 attained three consecutive all-time (intraday) highs since. New highs appear to have been needed to flush out premature bears (again).

Although there may be more ‘flushing’ to do, other indicators suggest risk is rising.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.