Tuesday, September 25, 2012

What excessive bullishness?

There was a lot of comments over the weekend about how investor sentiment is getting excessively bullish and it is time to be more cautious about stocks. In particular, there was a lot of references to the Barrons Santoli article about too much complacency. One reader cited charts of Rydex cash levels, asset allocation, money market funds allocations and the VIX Index as reasons to be bearish.

Oh! How a week of sideways consolidation deflated bullish sentiment. On Monday, I woke to see that the Bespoke survey shows that there are now more bears than bulls:

The Tickersense blogger sentiment poll (to which I am a participant and voted "bullish" this week) shows the number of bulls retreating. A good analogue to the current period is the August 2010 when Ben Bernanke hinted at QE2 at Jackson Hole in August 2010. Back then, the number of bulls spiked to a crowded long reading the Jackson Hole speech. Bullish sentiment retreated soon after, just as it is doing today.

Tickersense blogger bull/bear sentiment history

I would also highlight the stock market response to past programs of QE (from dshort.com). I annotated (in red circles) the dates of recent ECB actions.

Similarly, Deutsche has a research note out (via Business Insider) that indicates long/short hedge funds aren't buying this rally. The implication being that we shouldn't depend on this group of hedge fund managers to push equities higher.

I beg to differ. Their own chart shows an uptick in equity beta that is similar to the initial market surge from the QE2 episode in 2010 [annotations in red are mine]:

The moral of this story is investor sentiment readings can be highly fickle and bounce around wildly. No doubt bullishness receded further because of Monday's downdraft.

While I remain concerned about excessive insider selling, the positive momentum from monetary stimulus and the beta chasing activity of underweight institutions and hedge funds are reasons why equity markets are likely to power ahead to further highs. The current episode of pullback and consolidation should be regarded as an opportunity to deploy cash and not a time to take profits.

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.


Anonymous said...

Great counter-arguments. I'm neutral at this point as QE-infinity just makes no sense to me (none of the QE's have) but this last round basically just proves the Fed is out of bullets. Shame that they just don't get it. Its funny how there are no true capitalists out there. Can't take the pain of eating your medicine when you've lived beyond your means? Shame on these people.

Have a read of the following for arguments related to 'bullishness':


Michele said...

I agree. I voted bullish on the poll this week too. It may be unsettling to see people throwing Molotov cocktails in Madrid, but looking at the weekly and monthly SPX charts I'm just not seeing any topping action there despite the recent pullback.