Sentiment Update: Individual Investor Sentiment Drops

The NAAIM (active money managers) survey for this week showed an increase of 5.4% in bullish sentiment while the AAII (individual investors) survey showed large decrease of 8.7%.

This week, active managers have, on average, a 76% allocation to equities. This is up from 71% last week. The median allocation rose to 95% while the top quartile of active managers have an allocation of 100% or greater to equities with the bottom quartile having a 56% or less equity exposure. The eight week moving average is now at 75%. The 76% bullish allocation is more than one standard deviation from the historical average.

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

Individual investor’s bullish sentiment dropped to 42% this week from 51% in the prior week. This large drop means that bullish sentiment is now within one standard deviation from average. According to Charles Rotblut at the AAII,

“Despite the decrease, bullish sentiment remains above its historical average for the 21st consecutive week. This is the second longest streak for above-average bullish sentiment since the survey began in 1987.”

Bearish sentiment rose to 34% from last week’s reading of 29%. The Bull-Bear spread is at 8%, slightly lower than the series average of 9%. The eight week moving average of bullish sentiment decreased to 52%.

Finally this week we look at one additional seemly contrary indicator; the equity put/call ratio. Since late 2003, when the 20 day rolling average put/call ratio has fallen below .55 (roughly 1 standard deviation from average) the average 30 day returns are -2.2% (-0.7% median) versus a series average of 0.2% (0.8% median). The current 20 day average put/call ratio is .53. The last time the ratio dropped below .55 (April ’10) the market sold-off roughly 14% over the next month-and-a-half.

Overall, investor sentiment remains high. After today’s large sell-off it will be interesting to see how both markets and the sentiment surveys react next week.

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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