I tweeted yesterday that I thought the risk/reward for equities at current levels just didn’t make sense…at least for me (everyone is of course different). Seeing the $VIX come crashing down with the Put/Call ratio showing a big dip in put buying shows us that traders don’t think stocks can fall. The sentiment data appears to be telling us a similar story. For today I want to show some various sentiment data sets to better describe why I think the ‘buy the dip’ mentality has gotten a little out of whack. All of these charts come from SentimenTrader, which is an excellent service.
First up we have the AAII sentiment survey. This survey looks at where individual investors think stocks are headed. For the better part of 2013 we’ve been toying with the 65% bullish level with only one dip under 35% for the entire year. It appears retail money has caught on to the notion that ‘buying the dip’ is the investment strategy in vogue right now.
Next up we will take a look at a survey of investment advisors. Investors Intelligence, similar to AAII, surveys advisors and how they feel about the stock market. Again – for most of the year they have been firmly bullish without a single dip under 55% in two years.
We’ve seen the discussion of margin debt for most of the year as it continues to tick higher, even hitting a new high in September. Increases in margin debt are typically signs of risk taking. But where are investors putting their dollars? Well it isn’t cash. The percentage of assets in equity mutual funds and equity ETFs vs. money market has now exceeded the 2000 and 2007 highs. For every dollar in a money market account there are nearly 3.5 in stocks. It doesn’t seem to be the case anymore that investors are sitting on the sidelines holding cash. We can see similar signs in the amount of cash held in mutual funds, which is also historically low right now.
Does all of this mean stocks will come crashing down? Absolutely not. I view this data has a sign that traders have grown excessively optimistic on the stock market and to some degree rightfully so as we are up over 20% in the S&P 500 ($SPX) YTD even in the face of political drama and middle east conflicts. I continue to respect price and will always allow it to lead my bias but I still am reminded of the piece I wrote a few weeks about the similarities in 2013 and 2007.
While the sentiment data appears to be overly bullish we can’t lose sight that as we wrap up October, November begins the start of the historically best 6-months of the year. We also have hedge funds potentially chasing performance into year-end to contend with. As I stand cautious I continue to look for bright spots in this market. Josh put out a great list of reasons to be bullish right now – many of them make since and he’s too smart of a guy to simply ignore it. So I stand conflicted.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.