Friday, January 13, 2012

Which Merrill sentiment indicator to believe?

A former Merrill Lynch colleague pointed out to me last week that the Sell Side Indicator, a contrarian indicator based on the average recommended equity weighting of Street strategists, is edging towards a buy signal:

The record of the Sell Side Indicator has been fairly decent:

On the other hand, Surly Trader also pointed out that the bull-bear ratio based a survey of institutional managers compiled by BoA/Merrill Lynch is flashing a sell signal:

Which sentiment indicator should we believe? It's hard to be a contrarian investor when two sentiment indicators tell completely different stories.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


John said...

Thank you Cam. It's always nice to discover some new high quality discussion about the markets. Where can you find these Merrill charts published?

Cam Hui, CFA said...

The charts aren't published regularly anywhere. You have to be a client or have access to a client who gets their research.

Tiho said...

AAII sentiment indicator is useless for top picking majority of the time. The best way to use it, according to historical studies, is when bearish sentiment rises. Besides this is a very volatile short term indicator, where bulls will scatter in a week or two if S&P 500 declines 5%.

On the other hand seeing Wall Street analysts and strategists bearish (in your chart), seeing blogs across the net constantly bearish (like yourself), hedge funds under invested, sitting in cash and having a terrible previous 12 months, mutual fund outflows at ridiculously high levels all tends to signal stocks have more juice to push forward, with a possible pull back in the short term.

Merrill Lynch Fund Manager survey cash levels are ridiculously high, matching late 2008 early 2009. This also proves that many fund managers are earning 0.25% yield and missing on returns. They will reinvest for sure.

Just watch the Treasury Long Bond here. If stocks correct 5% in coming weeks, Long Bond should break 146 on the futures and create an upside break out. Deflationists and super bears and perma bond bulls will rejoice. At that point guys yourself will be saying: "Oh look Treasuries broke out again."

But that will be a bull trap and what will follow is a major bond correction and a significant rise in yields. Remember how you got trapped October 04th 2011 false break down on the S&P 500?

In 2012, Euro will stage a super rally, European Bond Yields will fall, Credit Markets will relax, Treasuries will sell off together with the US Dollar and Equities will challenge 1370 on the S&P 500, with Financials and Banks outperforming. Pretty much everything opposite to this blog.

However, since the can has been kicked down the road, this will all come back in 2013 for the final climax of the crisis. I expect defaults in Europe next year and a massive panic in the markets!

Word of advice - Don't follow consensus, which is expecting weak first half and improvement in the second. Economy will recover in the first half (it already is - look at ISM), and when consensus switches to bullish camp proclaiming the recovery is intact - same guys like yourself who were calling for a recession in August 2011, only than will the recession surprise in late 2012 / early 2013. Business cycle is very old now, so recession is just around the corner...