Thursday, January 5, 2012

Sentimental Stretch

I can't turn to the left or the right
I'm too scared to run and I'm too weak to fight
But I don't care
It's all pschobabble rap to me
--Alan Parsons Project

Sentiment measures seek to reflect to extent to which market participants are optimistic (bullish) or pessimistic (bearish). When sentiment indicators reach extremes, they often suggest turning points. For example, if sentiment indicators suggest most market participants are bullish, then perhaps most of the buying has already occured, and supply/lower prices may be around the corner.

There are many measures of sentiment. The prudent market participant usually watches a bunch of these indicators for general trends rather than focusing on a single measure.

That said, the recent weekly AAII sentiment index numbers, which measures bullishness/bearishness of a group of individual investors, suggests extreme levels of bullishness versus historical levels.

As noted, only one piece of the puzzle. But one suggesting that optimism, at least among a particular category of investor, is getting stretched.

position in SPX


dgeorge12358 said...

In the week ending December 28, investors pulled $3.988 billion out of domestic equity mutual funds. This represents the 19th consecutive outflow since a tiny inflow in mid-August, which if excluded would mean 36 consecutive weeks of outflows beginning in late April, or roughly the time when the market peaked.
~ICI data via zerohedge

fordmw said...

influence of etfs?

dgeorge12358 said...

2011 Year-to-Date Net Flows as of 12/21/11

Equity Mutual Funds -$40B
Balanced Mutual Funds +$6B
Bond Mutual Funds +$53B
Money Market Mutual Funds -$108B
Equity ETF's +$43B
Bond ETF's +36B

Total -$10B = deleveraging

Source: Morgan Stanley Research

fordmw said...

$43B equity ETF - $40B equity mutual fund = $3B net equity INFLOW (plus maybe another $3B coming from balanced MFs)