Newsletter Sentiment Skews Very Bullish

There is a rather interesting and important column by Mark Hulbert this Sunday in the NYTimes. In it, he discusses the state of Bullish and Bearish sentiment.

Since this rally began over the summer, there has been an ongoing debate about whether there has been sentiment extremes. I have argued that the VIX, the put call ratio, the lack of 1 or 2% down days, and the reckless abandon which people have been buying equities has been signs of bullish sentiment. It had gotten frothy, but not quite excessive yet.

Others have said the "disbelief in this rally" proves the lack of excessive bullish sentiment. Dresdner Kleinwort’s James Montier notes that the rally has been driven by the "Fully Invested Bears and rampant complacency" — that hardly sounds like bearish sentiment is dominating  the discussion.

Although I always aim to use quantifiable data, rather than gut feel. The one exception has been the "propped up feel" to the market pre-Election: It started with the changes in the Goldman Sachs Commodity Index, which led to the huge energy complex sell off. Either Goldman’s commodity group is run by a bunch of clueless dolts and naives — or this was a purposeful attmept to influence the US mid-term elections.

The second "gut issue" has been the midnight Futures buyers — gobs of SPX futures bought 25 handles above closing prices smells like manipulation — at least, thats the verdict by several people with far more Wall Street  experience than I.

Since I am not a conspiracy fan by nature, let’s get back to quantifiable data, rather than gut feel. One measure that ha sbeen track fro a long time is the general "Bullishness" of newsletter writers.  According to Hulbert, investment newsletter editors are about as bullish as they have been in
nearly five years — and that doesn’t bode well for the stock market:

"When investors are wildly optimistic, head for the hills; when they are truly pessimistic, buy stocks. That, at least, is the counsel of contrarian analysis, which derives its name from the idea that the market, in the near term, rarely does what the majority expects it to do.

When pessimism and despair reach extreme levels, for example, contrarians believe that the market is at or near a bottom. That’s because any short-term traders who are likely to sell their stocks when conditions are unfavorable will have already dumped them — removing potential selling pressure that could drive the market still lower. The reverse is the case, the contrarians say, when optimism is extremely high.

Consider the sentiment that prevailed when the stock market hit a low in June this year. According to The Hulbert Financial Digest, investment newsletters that focused on timing the stock market’s short-term trend recommended, on average, that their subscribers allocate 88 percent of their equity portfolios to cash and the remainder to shorting the stock market — an aggressive bet that stocks would fall further. Far from declining, of course, the Dow Jones industrial average is now almost 1,500 points higher."

That’s the theory underlying contrarian sentiment analysis.

"By Nov. 24, by contrast, the average recommendation of this same group
of newsletters had changed greatly — to allocating nothing to the short
side of the market and 71 percent to the long side. Though the
newsletters cut their average recommended exposure by 12 percentage
points on Thursday, to 59 percent on the long side, the level is still
very high — double the average since the bull market began in October

Bottom line: At least by this one single measure, sentiment has reached a pretty aggressive level — not off the charts extreme, but certainly noteworthy.   


graphic courtesy of NYT

As we noted last week, a modest short is in order in case last week’s market cracks expand. My gut says the Golidlocks crowd might have one last year end spurt in them.

I continue to marvel over the chasm between what is happening on trading desks/in the market, and the economic realities on the ground. Eventually, this "disconnect" will get resolved — either by the economy turning upwards, or the market turning downwards.

Meanwhile, we will continue to monitor our individual indicators and sector analysis.

When Wall St. Looks Like Pamplona, Sound an Alarm
NYTimes, December 3, 20

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What's been said:

Discussions found on the web:
  1. lurker commented on Dec 4

    Forget Goldilocks. I call this rally Moldy Lox. Old and fishy in the extreme!

  2. ECONOMISTA NON GRATA commented on Dec 4

    Conspiracy….? I went to a shrink for years because I had a persecution complex, that is, until I realized that everybody was really conspiring against me.

    I see a fashion trend in the equity market, It’s kinda like the leasure suit thing. You can’t believe that people are wearing them. Perhaps one more push on the upside and then the market will go the way of the DOUBLE K…. Goldilocks….. Goldilocks….. Goldilocks….. Goldilocks… :-) Perhaps this will help…

    Best regards,


  3. jmf commented on Dec 4

    .. 59 percent of fund managers now say they believe that the economy next year will remain as strong as it is now or will improve, according to a recent survey by Merrill Lynch. That’s up from 32 percent of fund managers who thought so in October

    The percentage of investors who think that the economy is likely to slip into recession, meanwhile, has shrunk to 8 percent from 20 percent last month.

    That’s not the whole story. Investors are also growing more bullish about the outlook for corporate profits. Today, half of all domestic fund managers think that earnings will remain steady or improve in the coming 12 months. A similar survey in September showed that only 18 percent felt that way….

    IN reality, profits for most S.& P. 500 companies are growing much slower than 9.6 percent this quarter. If you stripped out the financial sector, where a profit surge of 32 percent is expected, corporate earnings would be likely to grow by only 3.1 percent……

  4. Michael C. commented on Dec 4

    If you ask me, I think think it will soon be time for the market to teach these mutual fund managers another profound and refreshing course on risk – not risk of underperformance, but rather risk of losing capital.

    So many negative data points, a much inverted yield curve, and corporate shenanigans have been ignored for so long it boggles the mind.

  5. S commented on Dec 4

    thanks jmf

  6. idontworry commented on Dec 4

    why would people not be bullish, the market has been in rally mode since july. everytime i read about more shorts or bears trying to cathc a top …. the market cranks higher. like today.

  7. idontworry commented on Dec 4

    why would people not be bullish, the market has been in rally mode since july. everytime i read about more shorts or bears trying to cathc a top …. the market cranks higher. like today.

  8. TempusFugit commented on Dec 4

    “I continue to marvel over the chasm between what is happening on trading desks/in the market, and the economic realities on the ground.”

    But is it really a chasm? The Big Pic has been lucid, data-based and accurate with respect to the housing downturn. I believe the flaw in the thinking is in positing such a strong connection between this sector and the broad US economy. Looking back on the 1980s and 90s we did not have one, continuous, uniform expansion. Instead we had a series of “rolling recessions” including the rust-belt starting in the seventies, the oil patch in the eighties, the defense industry in the early 90s, to name a few. Now the forces of creative destruction are ripping through housing. As with the other sector-level reecessions this will slow the economy in the aggregate but will not be catastrophic. Indeed, in the long run it’s a good thing.

  9. Polly Anna commented on Dec 4

    Anybody have any links to the whole “midnight futures buyers” stuff. I read the stuff here and Jeff Saut’s column at Raymond James a couple weeks ago, but was looking for more and my google searches aren’t even coming close. :) TIA

  10. angryinch commented on Dec 4

    I don’t think this newsletter indicator is very instructive. These guys are basically trend-followers. So when the market is rising, they are bullish. When it’s falling, they get bearish. They just follow the market. That’s why they were so bearish in June, the SPX had just fallen 8% in six weeks.

    This indicator has more predictive value when these newsletter guys are countertrend, i.e., when they are staying bearish despite the market rising or staying bullish despite the market falling. When you get a disconnect, that’s when it gets interesting.

    But if they are just following the market up or down, I don’t see how that is contrarian, counter-contrarian, etc.

  11. super-anon commented on Dec 4

    This rally has so much life in it I think it’s going to take an economic sledghammer to put it to rest. We’ve gotten to the point of a full-fledged mini-bubble IMO.

    I think the death blow is coming, but I’m not about to place a bet on when.

    Fortunately us rational investors still have the bond market for a while longer. It’s been a good 6 months…

  12. angryinch commented on Dec 4

    So much life in it? The SPX is up 1.5% over the past 7+ weeks. BFD. Looks no different than all the other creepy-crawly tops the market has put in since early 2004.

  13. MarkTX commented on Dec 4

    I agree with you fully super-anon,

    heck, it may take 2 or 3 sledgehammers for this “robbing peter to pay paul” market to go down anything more than chump change.

  14. Macro Man commented on Dec 4

    What would Q4 profit growth look like if you stripped out the homebuilders, jimf?

  15. my1 commented on Dec 5

    Don’t forget hedges. With 10x US GDP in derivitaves flying around, I think most traders are buying into the hype and then convincing themselves that they’ll play safe with a short position on the side.

    Problem is that although that sounds rational, it simply CANNOT be that easy. People say the Dow can’t crash. I think we’ve invented a way that it can – and it cost us $480 Trillion – and counting.

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