Indicator of the Week: Scanning the Various Sentiment Polls
By Rocky White, Senior Quantitative Analyst
Foreword: As experts on sentiment analysis, we track a whole host of sentiment polls. This week, we'll take a look at a few of these surveys, compare their methodologies, and see what they're telling us about how investors feel right now. Keep in mind that, as contrarians, we consider high levels of pessimism to have bullish implications for the market. Negative sentiment signals the presence of sideline money, as well as the potential for quick, big gains when that money begins buying into the market. Of course, the bullish implications are most valuable when the widespread pessimism runs counter to the market's direction.
Investors Intelligence: I've written about the Investors Intelligence (II) poll before. They've been around a long time; we actually have data from them dating back to the early 1960s. To conduct this poll, II gathers various publications on the market and determines their stance. Then, they show the percentage of financial advisers who are bullish, bearish or expecting a correction (i.e., short-term bearish, but longer-term bullish).
Below is a chart of the percentage of bulls and bears from the II poll going back to 2009. It shows the bears are currently at their highest level since the March 2009 bottom. Accordingly, the bulls are low -- but the percentage was actually lower in August 2010. That August pullback in the S&P 500 Index (SPX) was actually a higher low, as the market was up from a month earlier. However, it really freaked out investors, which was a sign that pessimism was rampant and a rally possible.
Again, we like the pessimism that is evident in the latest II poll -- but at the time the survey was conducted, the market was hitting fresh lows. So, that diminishes the bullish implications.
AAII: AAII stands for the American Association of Individual Investors. Each week, they ask their membership where they think the market is heading in the next six months. Then, they group those responses into three categories -- bullish, bearish, and neutral -- and report the percentage for each.
As you can see from the chart below, this poll is a lot more volatile than the II poll. That makes sense, as those who actually publish their market outlooks would probably be more stubborn about changing their opinion than those who are informally asked every week, "Where are we headed?" In fact, the poll was so volatile from about April 2009 through mid-2010 that it was nearly useless. In late 2010, the bulls climbed to pretty high levels, while the bears fell to very low levels. The market still had some room to the upside at that point, and continued to rise through February 2011. After that, the SPX pulled back significantly and became quite choppy. The index then hit an annual high in May, and we're down significantly since then. Currently, the bears are at a pretty high level, but the bulls are not at their annual lows, and are actually rising.
NAAIM: This is a newer survey, which has data going back to only July 2006. NAAIM stands for the National Association of Active Investment Managers. What sets this poll apart from the rest is that this poll does not simply ask, "Are you bullish or bearish?", but instead asks money managers how their money is actually positioned in the market. They can answer anywhere from -200 (leveraged short) to +200 (leveraged long). This is valuable information, because the fundamental goal of our sentiment analysis is to see where money is positioned. Is it all crowded into the market, or all on the sidelines (or somewhere in between)? This poll asks that direct question.
There are some drawbacks to this poll, which NAAIM acknowledges on their site. For starters, it's not easy for some money managers to sum up their position in one simple number. Also, the sample size for this poll is growing, but it's not very big as of right now.
That being said, below is the chart of the NAAIM survey. It is currently at its lowest reading of all time, and is negative for just the second time ever (the first time was in October 2008, around the peak of the financial crisis). This suggests that money managers are short the market -- so any positive news that comes out, or any signs of life in the market, could spark a fast and furious short-covering rally.
Implications: Each of the polls I mentioned above is showing significant pessimism at the moment. This is to be expected, with the SPX down almost 15% since July. A positive catalyst could change the hearts of these bears, and the market could make a significant move higher. However, the overall price trend is lower, which diminishes the contrarian bullish connotations of the polls. Also, as far as the II and AAII polls go -- while bearish, they're still not as bearish as they were at the March 2009 bottom. This suggests panic could still lead to climactic selling, and another substantial decline.
This Week's Key Events: Alcoa Earnings, Fed Minutes on Deck
Schaeffer's Editorial Staff
Here is a brief list of some of the key events this week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
The economic calendar is bare on Monday, as government offices are closed in honor of Columbus Day. Mistras Group (MG) headlines a quiet day on the earnings front.
On Tuesday, the central bank will take the spotlight, with the release of the Federal Open Market Committee's (FOMC) latest meeting minutes on tap. Earnings season unofficially kicks off with Alcoa's (AA) post-close report, with quarterly results also expected from Joe's Jeans (JOEZ), Synergetics USA (SURG), and WD-40 Co. (WDFC).
The weekly MBA mortgage index is the only report of note on Wednesday, but Fed officials Charles Plosser and Sandra Pianalto are both scheduled to deliver speeches. Earnings are expected from PepsiCo (PEP), Adtran Inc. (ADTN), Infosys (INFY), ASML Holding (ASML), and Host Hotels and Resorts (HST).
Thursday's calendar includes the August trade balance, the Treasury budget, and the weekly report on jobless claims, as well as the government's holiday-delayed crude inventories update. Google (GOOG), JPMorgan Chase (JPM), Fastenal (FAST), Lindsay Corp. (LNN), Safeway (SWY), and Fairchild Semiconductor (FCS) will share the earnings stage.
The week wraps up with a flurry of economic data, as September retail sales, import/export prices, August business inventories, and the preliminary Reuters/UMich consumer sentiment index for October are all scheduled to hit the Street. The earnings calendar concludes with reports from Mattel (MAT) and Webster Financial Corp. (WBS).
And now a few sectors of note...
Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.
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