Our last discussion of sentiment (see Signs of a Market Bottom?) generated a heated debate about whether everyone was too bullish or too bearish.
The short answer is: It depends upon who you ask.
For example, the WSJ’s Marketbeat just reported:
"Optimism abounds among portfolio managers heading into 2007,
according to Merrill Lynch’s most recent survey of global fund managers.
While they believe global growth and corporate profits will weaken in
2007, the nightmare scenarios are being discounted, and investors see
the so-called Goldilocks scenario coming to fruition as the pace of
economic growth declines without a recession. “Compared to three months
ago, 8% of our panel no longer think we are in a late-cycle
environment, but are instead still in the mid-cycle phase,” they write.Overall, fund managers see global growth receding in 2007,
and for earnings to decline. But they believe corporate balance sheets
are in good shape, with a net 55% saying balance sheets are
under-leveraged. Oddly, while managers believe, on average, that stocks
will be higher 12 months from now and believe equities are undervalued,
most investors are taking slightly lower-than-average risks in their
portfolio, suggesting a somewhat defensive stance — and their sector
allocation proves it. Investors are overweight in banks,
pharmaceuticals, energy and insurance. They’re underweight in consumer
discretionary stocks and industrials."
Compare that cohort (albeit a professional and important one) with this subgroup: Bloggers: Ticker Sense’s
2007 Financial Blogger Outlook shows a very modest forecast: Financial Bloggers Expect the S&P 500 to Rise 2.39% in 2007.
~~~
When asking (or answering) the question "What is market sentiment like" remember that your answer depends upon who it is you are surveying . . .
An equally key question is “how do you define bullish?”
You, and the majority of commenters here, apparently define “bullish” as “any positive return on equities whatsoever.” My evidence for this statement is that the Bloomers article you referenced had two participants citing returns below 3%, and a consensus below 6%, and you several times referenced it as “bullish” or “unanimous bullishness” in paraphrase. Let’s call this “definition Barry.” [BR: please don’t put words in my mouth]
By using “definition Barry,” you have been able to put up a wall of angst that “everyone is bullish,” which is, by comparison to typical stock market returns, quite nonsensical.
Some of us have a different definition. We would refer to a projection that is significantly above the typical return on equities as bullish, a projection that is significantly below the typical return on equities as bearish, and any projection that is near a typical return as neutral. Let’s call this “definition Bill.”
We can quibble, and as a matter of fact, have quibbled, almost endlessly over *exactly* what the average annual stock market return is, and what time period it should be measured over, etc. Enough. It suffices to say that a 5.5% return is below any reasonable measurement of typical returns on equities. The 2.4% is, as well. The survey of Business Week participants put in a consensus 8%, which is, depending on time period used, either in or slightly below the typical range.
By “definition Barry,” all three, Bloomers, BW, and Bloggers, are “bullish” because they all expect a positive return. By “definition Bill,” using the most conservative (read: low) estimates of typical returns, you have two “bearish” and one “neutral” survey. Using a 1980 to present sample for “typical,” all three are “bearish.”
I would like for you to directly address what you consider “bullish,” “bearish,” or “neutral,” in terms of percentage returns. I ask for percentage returns because it avoids a debate over time frames for measuring “typical” and allows you wide latitude to choose broad ranges. I don’t think that a comparison to a crowd is meaningful because (1) it depends on the crowd, (2) trying to measure crowd sentiment on a curve is self-referential; only individual sentiment can be measured on a curve, and (3) the crowd’s sentiment changes over time.
I would consider both of those surveys bullish. None are really expecting anything other than a minor decline.
Who knows. Maybe small caps will see PE expansion as David Kotok has said. FROM NEAR 40 TO NEAR 100. Unlike the bubble in 2000 which was only in megacap capex and internet, the broad market is massively overvalued today. But, what the heck! It’s Christmas! Or Hanukkah. Or, if you invest in equities, it’s A MADHOUSE! lol.
I ignore the sentiment figures. There is so much opinion available online now. If you are a heavy reader you will always find bullish and bearish viewpoints. This will affect your views on sentiment.
…and which market you’re talking about (equity, bond, commodity, etc.)
So BDG123 is firmly in the “definition Barry” camp of “positive = bullish.”
Emmanuel, your point is well taken, but this thread, the previous thread, and all surveys mentioned are equities.
This is also anecdotal but discounts abound. The wife bought my son an xbox 360 (arghh the world is ending) and got a $100 gift card from toys are us with it. Also bought a Dyson vacuuum at target, got a $50 gift card. Margins have to be taking it on the chin. This is in upstate NY.
I define Bullish differently, depending upon who we are discussing (perhaps that was too subtle a point of the above post)
Traders are bullish if they are LONG, and if they are dip buyers. If they are sellers into rallies, or are in cash or short, they are bearish.
Strategists are different still: What they say individually matters less than how the herd thinks and behaves. They are NOT investing dollars, so they are often driven by peer pressure, by the past 3-6 motths of the market. While in theory, they represent a lot of investable dollars, the reality is that they weigh themselves by other metrics. Hence, when Richard Bernstein throws in the towel, it typically is because he has been too bearish and the market has run away.
When no strategists have the balls to be negative, its likely cause is rampant bullishness in the press and amongst their peers. That’s why 8% is not relevant to me in that survey — but all major strategists looking for gains has some meaning.
Barry…I think you might be giving Strategists way too much credit. Also, while Rich Bernstein has been wrong the past few years (bearish), he is by NO means a Don Hays bull right here…BTW, Hays has a better long term Macro record than ANY on that list…including Bernstein.
I think Bill has a point.
I’m not sure if this would count as a measure of market sentiment but the spec’s and nonreportable (retail investor) are solidly in the long camp in the futures market. These traders are typically trend followers. The large commercial positions are at historic short positions. The commercials are generally regression to the mean traders. About 75-80% of the time when the commercials reach an extreme net position either long or short a trend reversal soon follows.
people always underestimate how much the market can move.
64% of the bloggers in the above poll expect less than a 10% move either way in the s&p500.
using data back to 1925 (it’s what I could find easily), only 27% of the time does the market finish within 10% of the previous years close, whereas 64% of these bloggers expect less than a 10% move.
and even looking at the most bullish and bearish forecasters only, they predict an up move of 14.7% and down move of 19.3% respectively. again looking at the historical data, 35% of the time the market has moved by MORE than that.
personally, i struggle to see how it would be an up move this year. if the economy really is weakening, then if assume a mere 10% drop in profits and a not unreasonable drop in the P/E multiple from 18 to say 15 (i think its about 18 now right?), that would take the market down 25%…and those assumptions seem conservative to me. downside looks pretty steep.
I don’t believe “all [strategists] looking for gains” has meaning, because it ignores the MAGNITUDE of the gains they are looking for. Obviously, a consensus 15% is different from a consensus 8%, or a consensus 25%, even if all surveyed projected a gain in every case. Given your statement, if all the surveys answered between +1% and +5%, with a consensus +3%, you would say something to the effect of, “well, none of them have the balls to call a down year!”
The Bloomers survey went from +1.1% to +14.4%, with average and median of 8% and 8.4%. The average and median are at most neutral, and in view of the last 26 years, would be moderately bearish. Nowhere is there an extravagantly bullish prediction! In fact, +1% or +3% years are much LESS common than +14% years! If you view the distribution of their projections against a distribution of historical market returns, it will be clear that they have a bearish slant, i.e., projecting a year that is not as good as a typical year.
Obviously, the “rampant bullishness” didn’t embolden any of them enough to give them the balls to make really high call, like +20% or more. I mean, if “rampant bullishness” can only give you balls enough to do a +8% consensus and a max +14.4%, then maybe the more rampant ones need to drink more Red Bull. +14% is a gutless call for a “rampant bull,” don’t you think?
You might try to get some perspective by looking at the spread and consensus for 2001, the last time they all projected a positive year for equities. Was the range from +1% to +14.4%, with a consensus +8%? Or was it, maybe, just a wee bit higher? Why don’t you dig that up, and post it, so we can see a REAL case of “rampant bullishness?”
Oh, BTW, if you find a trader with a year’s average holding time, try telling him that a 3% gain over a year is “bullish” and see what he says …
Second, I don’t believe “all [strategists] looking for gains” has meaning, because it ignores the MAGNITUDE of the gains they are looking for. Obviously, a consensus 15% is different from a consensus 8%, or a consensus 25%, even if all surveyed projected a gain in every case. Given your statement, if all the surveys answered between +1% and +5%, with a consensus +3%, you would say something to the effect of, “well, none of them have the balls to call a down year!”
The Bloomers survey went from +1.1% to +14.4%, with average and median of 8% and 8.4%. The average and median are at most neutral, and in view of the last 26 years, would be moderately bearish. Nowhere is there an extravagantly bullish prediction! In fact, +1% or +3% years are much LESS common than +14% years! If you view the distribution of their projections against a distribution of historical market returns, it will be clear that they have a bearish slant, i.e., projecting a year that is not as good as a typical year.
Obviously, the “rampant bullishness” didn’t embolden any of them enough to give them the balls to make really high call, like +20% or more. I mean, if “rampant bullishness” can only give you balls enough to do a +8% consensus and a max +14.4%, then maybe the rampant ones need to drink more Red Bull. Plus 14% is a gutless call for a “rampant bull,” don’t you think?
You might try to get some perspective by looking at the spread and consensus for 2001, the last time they all projected a positive year for equities. Was the range from +1% to +14.4%, with a consensus +8%? Or was it, maybe, just a wee bit higher? Why don’t you dig that up, and post it, so we can see a REAL case of “rampant bullishness?”
Sorry for the double post, meant to edit and replace.
:-(
FWIW, bullish or bearish sentiment doesn’t imply magnitude to me. Not sure it even necessarily implies direction if the expected/predicted market move(s) is small. When I see a market where risk premia are becoming smaller and smaller, where investments that are risky remain unhedged or weakly hedged and investing generally appears to be proceeding on the assumption that a major loss is unlikely …well, I’d guess that’s bullish.
Traderb,
You make an excellent point. Fat tails. Long term averaging means squat quite often.
Btw, Don Hays hasn’t been managing money through any significant corrections other than 2000 so ……….. I put him in the “untested” camp. Sort of like Cramer. Plus he’s a buy & hold guy. Oh, and he loved tech over the last four years and hated energy. Any quant with half a brain could have told you that was the biggest investing mistake in the last ten years. I could go on and on and on about his commentary and investment decisions but then it is the holiday season.
I imagine Hays has been running money longer than you BDG. What “significant” corrections has he missed?…..He was one of the most bearish strategists at the top.
Get a clue.
BDG123
Please go on and on and on and on ….. we love your rants
Your mother has been on this earth longer than you as well. What’s your point? That time in service makes someone better at it? By inference, does that mean Barry isn’t qualified since he’s a relative newcomer to Wall Street.
You didn’t address anything I said. You just spewed vile.
Where do you work? Let me dispatch Chainsaw Al. He’s been a CEO for a long time. Let’s send him over to whip your company into shape. Time in service being such an important criteria to you.
Maybe some day I’ll get a clue. Can you at least give me a hint?
BDG
thanks , that was priceless
You inferred he’s a rookie…untested. That’s laughable. You didn’t answer my question Einstein…what “significant” correction did he not manage money in?
Kids — please play nice
Why thank you. I’ve never been called Einstein before. How about I return the favor. I’ll call you Don. LOL!
Speaking of sentiment ,
the latest commitment of traders report showed net commercial US dollar index longs surged to the highest since late 2004– moreover, net large speculative traders have the largest net short position in the US dollar index since late 2004. The $ index made a significant bottom in late 2004 and rose 15% over the next 11 months………….a recent survey by Bloomberg of traders, investors and strategists showed only 9% of $ bulls versus the euro. $ bulls were 7.4% around the significant bottom in 2004 …..
any thoughts from the macro mavens out there ??
the latest commitment of traders report showed net commercial US dollar index longs surged to the highest since late 2004– moreover, net large speculative traders have the largest net short position in the US dollar index since late 2004.
I’m not sure what the story is here between the two. A continuing drop in the dollar will prop hard assets so long as it is a steady drop. So on the one hand, you have the COT short big the indices. But they are short the dollar as well, which a falling dollar to me points to asset inflation and will hold up the indices.
The best case scenario, at least for those positioned as such, would be a crash in the dollar which leads to a crash in the indices.
Why is Nausabomb (millionaire now) in this list?! Immediately, the poll is rendered meaningless, unless you equate mastering cut-and-paste keyboard techniques with some home-selling expertise and elevate those skills to financial-guru-ship..
If the dollar continues to fall and hard assets rise specifically oil I would think that would put severe pressure on a already slowing economy. If the dollar were to break through multi decade support at around 80 I would have to wonder if we might not be in severe trouble at that point.
The insiders seem to be lightening up, for now. My sentiment indicator suggests that short term, the market has lost “momentum” and will be soft. Caution indicator is flashing a probable sell off is in the works but confirmation is lacking.
Generally, the indicator is only good for a few weeks and confirmation tends to lag powerful market turns. (Risky to bet big either direction on caution)
Probably a good time to sell and bad time to buy. You know what they say about free advice……
Imagine if Barry Bonds gets up to bat. Who in the world would bet money that he’ll strike out. No one in their right mind, cause he’s good. When you have that rookie player who barely made the draft who is just under par in RBI, you may do as you wish.
We can NEVER tell a proper bull from a bear until its over. Warren Buffett looked like a bear on stocks in the 90s cause he didn’t buy Microsoft and comes 2003 and he’s making better returns than almost everyone on Wall Street.
Chances are however, and I actually read an article from Buffett (who so many times “claims” not to believe in bull and bear markets), that the markets seem to move in 17 year segments, with GDP usually moving inversely – that’s in relative strength – to the overall market. He cites examples which I unfortunately don’t have on hand.
We are in a bull market in commodities. What stocks will do next is anyone’s guess.