Monday, October 20, 2008

Where are the equity bears?

After one of the biggest equity market declines we’ve seen in recent memory and a looming worldwide recession, investors should be worried and bearish, right?

It seems not. Maybe this all stems from Warren Buffett's clarion call to buy US equities last week. Readings from sentiment models indicate that either investors are not bearish enough or plain outright bullish on the market, which makes me concerned that there is more downside to come.

AAII survey not bearish enough
The chart below shows the AAII sentiment survey. After the recent freefall in the stock market, it is amazing to me that sentiment readings are less bearish than they were at the last short term market bottom:

Hulbert indicators confirm lack of bearishness
We also have several confirmations of this lack of bearishness. Mark Hulbert recently wrote that the newsletter writers who advise buy-and-hold strategies haven’t thrown in the towel yet and moved to market timing:
Historically, buy-and-hold tends to reach its peak of popularity at market tops, just as market timing becomes most out of favor. The inverse tends to be the case at market bottoms.
On Thursday October 16, Peter Brimelow also confirmed that newsletter writers’ sentiment wasn’t bearish enough:
The Hulbert Stock Newsletter Sentiment Index, which reflects the average recommended stock-market exposure among a subset of short-term stock market-timing newsletters tracked by the Hulbert Financial Digest, stood on Wednesday night at negative 12.8%. That's sharply higher than last week, when it was at negative 33.5%, although the Dow was 1,400 points higher and Mark Hulbert was already worried for contrary opinion reasons.

Bloggers are wildly bullish, individuals not panicked
What’s more, I was shocked to learn that there isn’t a single bear in the recent TickerSense’s blogger sentiment survey.

My own private conversations with individual investment advisors indicate that their clients are not panicked and some have even been buying. While these advisors mostly advocate asset allocation and buy-and-hold strategies, the lack of panic among individual investors is a huge concern for bulls.

On the other hand, there is a pervasive sense of doom on the economic front. The lack of doom among equity investors, however, point to more downside for the stock market.


Andrew Abraham said...

We have been chatting about this on myinvestorsplace... that many investors think this is a buying oppurtunity...the common opinion on our group is that this is could be a suckers rally... What do you think... Is this rally for real or not??

One needs to take into account all the liquidity put in the markets..

What do you think??

Andy Dong said...

What does the AAII sentiment entail?

What does actually track?


Mike C said...

Excellent blog; came across it on seeking alpha.

Regarding sentiment, there seems to be an ABSOLUTE TON of confusion and contradiction out there on this, and I really have no idea what to believe.

Barry Ritholtz notes record cash levels here:

4. Cash Allocation

Investors current allocation to Cash is well above its 21 year mean and are at the highest levels since ’02, ’98 and ’90 lows.

Hussman's weekly commentary:

The rush to dismiss Buffett's advice underscores the extreme level of bearishness among investors here. According to Investors Intelligence, just 22.4% of investment advisors are presently bullish. This matches the lowest extremes we've seen in decades. Extreme negativity of investors has generally been a useful contrary indicator of stock market prospects. That doesn't ensure that stocks have registered their final lows, but it contributes to a set of historically favorable conditions here.

On the flip side, I saw a reference to a blogger's poll that was extremely bullish.

So not sure how to interpret this. Maybe one has to differentiate between "smart" and "dumb" money when looking at sentiment. Or are sentiment measures getting distorted kind of like a Heisenberg principle where measuring it changes it? Maybe some who would normally be bearish are bullish because they are looking at other sentiment indicators that are bearish?