Sentiment update

Sentiment is lousy but I’m too depressed to talk about it . . .


  • Several public surveys show bullishness at very low levels, but . . .
  • Bearish is not at such extremes
  • Insiders are a hopeful sign
  • Much of the September nastiness may already be discounted
  • Bottom line:  sentiment closer to signaling buy than sell

I’ve been thinking that sentiment toward stocks is very low, and that it discounts a lot of bad news.  I’ve had a couple of clients tell me that the traditional Fall bounce, after a bloody September, is unlikely this year because we’ve never been in the jam we’re in now.  The bogeyman (shouldn’t it be spelled boogieman? if not, it looks like some sort of golfer) is either the government printing money, the moral decay of the nation, or some other ill.  In other words, this time it’s different.  Here’s a news flash:  it’s always different; the facts are never the same.

One blog I keep an eye on, Clusterstock, had this post today:  “Face It, Nobody is Bullish Anymore.”  In it, they ran through the major investor classes  . . .

  • Hedge funds – excerpt:  ” . . . these major players slashed their risk exposure to the stock market in the second quarter.”)
  • Retail investors
  • Equity mutual funds - looked at flows at stock vs. bond funds
  • Equity analysts – very low relative levels of buy recommendations

. . . to determine that there are no more bulls.

I’m pretty sure about this next statement, but don’t hold me to it.  Each of these groups is as bearish as they’ve been since March 2009.  As they say–and I don’t know what this means–that’s neither here nor there.  What I mean is that I’m not intending to make a statement based on that, just setting up for the comparison to the one group that is approaching bullish . . . the insiders.

They’re not to the March levels–you don’t want to be around when they get there, either–but they’re approaching our InsiderScore service’s bullish zone.  One would think they’d be the best informed and best able to determine when their companies’ shares are cheap.  Trouble is, they’re usually quite early.  According to InsiderScore, they were at their most bullish level of the last several years in December 2008.  Investing with them then would have involved two+ months of pain.  And they were quite bullish at the summer 2007 dip in the market, before Lehman Bros. went down the tubes and markets turned ugly.  InsiderScore also says there isn’t much conviction behind the move, and that if financials weren’t included the results would look much worse.

Notwithstanding the insider activity, it’s difficult to find much that’s being talked about that is bullish.  That, in itself, of course, has a bullish tinge to it.  Here’s how the thinking goes:

Theoretically, when the mass of investors is bearish (bullish), they’ve already sold (bought) everything.  If not, why be bearish?  Most surveys of investors, including the American Association of Individual Investors (AAII) and the oldest sentiment survey, Investors Intelligence, have Neutral categories, allowing for those who are bearish but still exposed to the markets.

If investors have already sold, who is left to sell when the next shoe drops?  Well, in fact, the same number of shares are left to be sold, but it’s likely the savvy investors–the patient smart money–who have taken the shares from the bearish ones.

The trouble is in determining when the mass is not just bearish, but really bearish.

For example, some folks have cited the above-mentioned AAII survey, which, last week reported the fewest bullish respondents since the March 2009 low. That’s true, but the same thing could have been said in July, and while it corresponded with a brief pop in equity markets, it quickly fizzled.  You can see that chart below.

What’s missing, though, are the bears.  They’re nowhere near the levels of March 2009–there are 30% fewer bears now (49.5%) than then (70.3%), as one can see in the chart below.

That means that the bulls haven’t become bears, they’ve just gone into the neutral camp.

Yet, there is no question that sentiment is decidedly pessimistic.

In its latest Advisors Sentiment report, a survey of investment newsletter writers, Investors Intelligence also reports that the percentage of bullish respondents is the lowest since March 2009.  This survey, however, also reported the highest outright bearishness since then.

Finally, on August 23, Oppenheimer conducted an informal survey of readers of its weekly Money in Motion dispatch.  In it they proposed seven scenarios for the balance of 2010, which they converted to annual results.  So, action from here through year end would result in full-year 2010 results that ranged from -10% to +10%.  Here are scenarios proposed.

  1. +7.6% full-year return
  2. +10%
  3. +0
  4. -10%
  5. -4%
  6. +1%
  7. 0% – a bumpier ride than in scenario 3

The responses came from “Switzerland, Germany, the UK, Canada, and Israel,” and from “Portfolio Managers (long only and hedged), Buy Side Analysts, Traders (Buy side and Sell side), Private Client Brokers, Sell Side Analysts, Commodity Traders, Currency Traders, a handful of High Net Worth Individuals and few members of the Media (print and TV).”

Here’s how the results shook out.  Just 40% of respondents thought 2010 would end up with positive returns.

We’re not at what Ned Davis would call a sentiment fat pitch, but sentiment is far closer to signalling a buy than a sell, and it likely accounts for a lot of Glenn Beck/September nervousness.


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