Sentiment Update: Bullish Sentiment at 46 Month High

Both the NAAIM (active money managers) and AAII (individual investors) sentiment surveys released this week show a spike in bullish sentiment. The biggest increase in bullish sentiment came in the AAII survey where the bullish reading jumped to 58% from 48% last week. This is the highest level since January 2007.

This week, active managers have, on average, a 72% allocation to equities. This is up from 70% last week. The median allocation jumped to 97% while the top quartile of active managers have an allocation of 100% or greater to equities with the bottom quartile at a 65% or less equity exposure. The eight week moving average continued its uptrend, now at 67%.

The NAAIM number measures current equity exposure (0% would be all cash, 100% fully invested). Additional detail can be found here.

After last week’s decrease in bullish sentiment, this week we see a large jump in the individual survey conducted by AAII. Individual investors increased their bullish sentiment for the next six months from 48% last week to 58% this week. Bearish sentiment also declined slightly to 28.5% from last week’s reading of 29.8% which means the large increase in bullish sentiment came almost entirely from a decrease in neutral sentiment. Individual investors are becoming more polarized with neutral sentiment at 14%, the lowest level since May of 2009. The Bull-Bear spread reached 29% and the eight week moving average increased to 49%, which is the highest level since January 2005.

Individual investor sentiment is well into the “extreme” territory (measured as one standard deviation above average) and is near the 60% level which would be a two standard deviation event with the NAAIM survey also approaching the “extreme” category.

For analysis of the subsequent equity returns based on sentiment surveys please see the flowing links. AAII research here and NAAIM research here.

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4 responses to “Sentiment Update: Bullish Sentiment at 46 Month High

  1. Shine November 14, 2010 at 1:39 pm

    Am I the only person who is nervous by this? As has been debated over at PragCap, I really don’t think QE2 is inflationary nor productive, as well as all the negative hype over $USD.
    And not to keep complaining, but I really think when F0XNews claims Friday’s selloff was due to Obama’s ambiguity…my gosh man. They are nothing more than Cramer w/o the cheerleading sound effects.

    • Shine November 14, 2010 at 1:52 pm

      Obama in regards to the tax cut extensions, which I’m in favor of extending. I can’t think of a better way to get money back into our (mainstreet) hands.

    • seekingdelta November 14, 2010 at 10:24 pm

      Thanks for the comment.

      Yes, sentiment at these levels make me nervous especially at the current valuation levels….although according to the Rydex cash flow ratio investors are still cautious.

      QE2, in my mind, is not beneficial. See Hussman’s comment from last week for a thorough lashing of Fed policy.

      In my opinion, Bernanke’s intention with QE2 is one of the following three things: 1) marginally lower borrowing rates from near all-time low levels in hope this spurs demand. I really hope he doesn’t believe this as there is no evidence (Japan, UK, US QE1) that QE lowers rates and spurs lending. 2) Change expectations and encourage a move from risk-free assets and with the hope of a resulting wealth affect (Shiller has debunked this myth) 3) Ready the QE mechanism for MBS purchases when the housing market double dips. In effect, a backdoor bank bailout.

      My sense is that it is a combination of 2 & 3 neither of which help the economy long-term.

      • Shine November 14, 2010 at 11:38 pm

        I agree on the 2 & 3, even Bernanke himself admitted to printing or psyching out to printing. I hate to fight POMO, but I refuse to grab a bid at these levels especially with insider selling at such extremes. I debated long on how do ‘we’ create demand, and the best I can see is from Mosler(Warren) as to cut taxes@thepaycheck via FICA or whatever to get the ‘cash’ back into mainstreet’s hands.

        Appreciate your work on the AAII and NAIIM surveys.

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