Thursday, July 11, 2013

Investors Don't Hate Equities, They Hate Bonds

After an 8% fall in SPX and a rebound to the May highs, how is investor sentiment; specifically, is there fear in the market that will catalyze higher prices?  This is pertinent as the prevailing meme continues to be that the current equity rally is one of the most hated of all-time. Fortunately, there is data to provide an objective reading on whether this is in fact the case; in short, the data doesn't support that view. There might be solid reasons to be long equities (trend, breadth, macro), but sentiment is not one of them.

Where there is fear, instead, is in bonds. Funds are very underweight and outflows have reached what in the past have been extremes. If your game is buying blood, bonds are for you.

Charts and pithy text follow.

Starting with AAII (individual investors),  equity bulls are up to 49%. Over 50% is considered overly bullish. You can see that the investors have been more bullish (2010) but that SPX tops have occurred with lower bullish sentiment (red circles) than today's. Chart is courtesy of Bespoke.

Investors Intelligence (investment advisors) bulls minus bears is now at 23% (red line). Over 30-40% is considered overly bullish and under 10% is overly bearish. This is closer to a bullish extreme but its best considered neutral at the moment. Chart is courtesy of Ryan Detrick.

Newsletter writers are also leaning far more bullish than bearish. Their recommended exposure to equities is near the highs. Chart is courtesy of SentimenTrader.

Junk bond yield spreads have increased off their recent lows but not by much. This reflects more greed than fear. In the past, spreads have been lower but important intermediate tops have come at similar levels (red circles).

AAII also tracks investors' allocation to stocks, bonds and cash. Cash levels (21%) are below average (24%) for the 18th consecutive month and equity exposure (62%) is above average (60%). Not a hated rally by either measure; there is room for equity allocations to move upwards towards 70%. The allocation to bonds is just 17%, the lowest since August 2009. Chart is courtesy of Pragmatic Capitalism.

BAML tracks institutional ownership of equities, bonds and cash each month. Starting with equities, managers with AUM of $700b are overweight by 48%. Over 50% is a bullish extreme and under 15% a bearish extreme. Clearly, fund managers are bullish at present. All of the BAML charts are courtesy of Short Side of Long and are current through April.

Fund managers cash balance (blue line) is 4.2%; above 5% is a bearish extreme and under 3.5% is a bullish extreme. This is neutral at present.

Where there is fear is in bonds. Fund managers are 50% underweight bonds. 81% expect long term rates to rise over the next 12 months; this is the highest level recorded by the survey since 2004.

Sentiment towards treasuries is at an extreme. Chart is courtesy of Trading Points.

The fear of bonds (brought on by the drop in May-June) is prevalent. Individual investors, like professionals, have been selling at a panic-level pace that has marked prior lows. Chart is courtesy of Short Side of Long.

This has pushed yields up to 4 standard deviations from the mean. That extreme has marked prior turning points (red lines). Chart courtesy of Lance Roberts.

The same extreme in selling has hit the muni market and also marked prior lows.