March 10, 2014

Equities

Recent AAII survey  readings came in at 41% bulls and 27% bears. Since the last report in early February, AAII readings have recovered back towards neutral levels. Averaged over four weeks or one month to remove volatility, AAII sentiment still continues to remain elevated. Interestingly, the last time this indicator reached oversold levels was all the way back in June 2013, almost a year ago. Since all markets and indicators eventually mean revert, we should expect that the current confidence in the retail investment community will not last forever… it never does.

Recent Investor Intelligence survey  levels came in at 55% bulls and 15% bears. While the bullish readings pulled back during the January correction and now returned back close to elevated levels once, bearish readings remained at extreme complacency all along. it is as if investors refuse to turn bearish at any sign of a sell off. The chart above shows that the II Bull Ratio is once again at dangerously high levels, where previous intermediate peaks have occurred. Caution is advised.

Recent NAAIM survey levels came in at 89% net long exposure, while this weeks intensity was at a whopping 177%, with even the most bearish of managers in the survey holding a net long position (a rare occurrence usually found near market tops). While this indicator experienced a sharp fall in bullish sentiment during the January correction, similar to II Bull Ratio, it has also recovered to elevated levels in only a handful of weeks. The two month moving average of net long exposure still sits above 80%, a similar level to the May 2011 stock market top.

Chart 2: We are now registering a 15th monthly equity inflow in the row!

Recent ICI fund flows  reports showed that equity funds had estimated inflows of $4.96 billion for the week, compared to estimated inflows of $5.83 billion in the previous week. Domestic equity funds had estimated inflows of $3.11 billion, while estimated inflows to world equity funds were $1.85 billion.   On the other hand, the recent report from Bloomberg show that Emerging Markets continue to experience outflows. with Europe the main destination for the hot money:

Withdrawals from U.S.-based ETFs investing in emerging-market equities and bonds totaled $11.3 billion this year, already surpassing the redemption of $8.8 billion for the whole of 2013, according to data compiled by Bloomberg. Funds investing in European assets added $5 billion in the first two months of 2014, compared with $18 billion full-year inflows in 2013.

Returns in emerging-market stocks this year are trailing their European peers the most since 2011 as China’s economy slowed, currencies from Turkey to South Africa tumbled while violent protests in Ukraine fueled geopolitical tension. In Europe, economic confidence increased for a ninth month in January, suggesting the scars from the ravages of the sovereign-debt crisis in 2011 are healing.

Recent Rydex fund flows  still continue to remain at extremely bullish levels. Rydex traders, usually considered as dumb money, are still pilling into US equities at levels not seen since the great Tech Bubble burst in late 1999/2000 period. Investors who are interesting in seeing the short term as well as the long term chart, should click here and here for the links. As you can see, there is no doubt about the fact that Rydex traders are completely swept away by the bullish market trend and in full speculation mode.

Chart 3: Hedge funds building long exposure towards extremes again …

Recent commitment of traders  reports (also known as dumb money) showed that speculators have not been shaken out during the January correction and have once again started to build their stock exposure towards extremes. Hedge funds and other speculators currently hold over 113,000 net long contracts, which is a substantial increase from 63,800 we saw during middle of February. As can be seen in the chart above, when contracts increase above 110,000 net longs, usually a pullback or a correction follows. Investors should also note that the last time we saw hedge funds collectively hold a net short positions, was all the way back in November 2012. In other words, it has been a long time since futures traders have been bearish.