Sentiment Overview: A Rebound In Bullishness

Seeking Alpha ^ | 6-6-2010 | Babak

[blam]

Sentiment Overview: A Rebound In Bullishness

by: Babak
June 06, 2010

Here is the sentiment wrap-up for this shortened (Memorial Day) week:

Sentiment Surveys

Let’s start with the weekly AAII sentiment survey of US retail investors. It shows a rebound in bullishness this week with those expecting the market to be higher 6 months from now at 37.1% (an increase of 7.3% points). The bears decreased from being the majority to just 40.8%. The changes result in an increase in the bull ratio from the slightly bullish 37% to the neutral 48%.

While the ever popular AAII weekly survey may give the impression that retail investors in the US are shrugging off May’s weakness the AAII asset allocation decisions say otherwise. According to the latest report, they have sharply reduced their equity exposure by cutting it back from 60% of their portfolio to 51%. What they’ve pruned from stocks, they’ve added to cash and bonds almost equally. Cash allocation increased from 20% to 24% and bonds from 20% to 25%.

With the exception of the bond allocation which is at an extreme, the equity and cash allocations provide little insight from a long term perspective. However, in the short term, the shift out of equities does indicate that investors are giving up on expectations for higher prices. This is the pattern of behavior that we normally see at the end of corrections. Had investors instead adamantly kept their long exposure or worse yet, increased it, I would be very nervous.

Usually the AAII asset allocation in equities shadows the S&P 500’s performance. The recent drop in allocation for equities however, is an asymmetrical response to the recent decline in stock prices which suggests the average retail investor is feeling a good amount of fear. In the past we’ve seen only two other similar drops in equity allocation and they’ve both been good intermediate buy points.

Investors Intelligence

The gauge of newsletter editors sentiment is basically unchanged from last week with 39.8% bullish and 28.4% bearish. This increases the bull bear ratio ever so slightly from 1.35:1 to 1.40:1. Otherwise, we have a relatively oversold condition which corresponds to levels that we saw at the February 2010 lows.

ABC News Consumer Comfort Index

American’s feelings towards their finances crept a little bit closer to the high established earlier this year in January. But for the most part things are still rather gloomy. This week’s CCI is at -44 which means that it is the worst consecutive length of time (137 weeks) below its long term average than the early 1990’s (187 weeks).

“This week 90 percent of Americans rate the national economy negatively, 27 points more than the long-term average; 74 percent say it’s a bad time to spend money, 11 points more than average; and 52 percent rate their own finances negatively, 8 points more than average.” (source: ABC News blog)

Click to see larger chart in a new tab:

Source: CitiFX

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[proxy_user]

Unfortunately, bullish sentiment is a bearish indicator.

It’s when no one expects the market will go up, that it does.

[stephenjohnbanker]

This guy is a clown. At least “chart man” Smith is funny.

[blam]

Friday's Controlled Descent in Equities: A Perfect Storm Is Brewing

"I doubt there's ever been a day like Friday before.

"Panic is usually followed by quick reversals. But calculated, organized retreat means gone for good. This is well-controlled retreat. The calm is scary. A perfect storm is brewing."