Tag Archives: Investor Intelligence

September Sentiment Summary

Dear readers,

It has been at least a few weeks since I’ve updated the blog and the newsletter properly. I have finally finished my trip traveling through Asia and now find myself back in the office doing the work I love so much.

I would like to thank all of the incredible people I have met on this trip, as well as existing friends with which I had an amazing time. I personally really enjoyed Seoul, South Korea quite a lot. I also have some plans in the future to travel to North Korea as well, which should be extremely interesting.

The blog posts will be back now, with a lot of action throughout the week!

Equities

Chart 1: Fund managers have started to reduce their exposure in stocks

Merrill Lynch Fund Managers Global Equity Weighting Source: Short Side of Long

  • This months Merrill Lynch Fund Manager Survey equity exposure came in at 47% overweight, relative to last months reading of 44%. Two months ago, global fund managers have pushed their exposure towards stocks at the second highest level in surveys history at 61% overweight. Since then we have not seen that much downside reaction in US equities (apart from small caps which I have been shorting), but downside has been evident in European markets, GEMs markets and even REITs. All of this is pushing the MSCI World Equity Index to break its uptrend. As we can clearly see in the chart above that fund manager positioning has not reached levels of fear usually associated with a contrarian buy signals, so maybe this is a sign that a more meaningful correction is just getting underway.

Chart 2: Emerging markets are not looking that healthy in recent weeks!

Merrill Lynch Fund Managers GEM Weighting Source: Short Side of Long

  • This months Merrill Lynch Fund Manager Survey GEM equity exposure came in at 14% overweight, relative to last months reading of 17%. Interestingly, at the beginning of the year we saw a huge underweight by global fund managers in emerging market equities, from which the MSCI EM Index rallied strongly and eventually leading to a breakout from a prolonged consolidation (observe Chart 2). However, the recent sell off in global equities has also impacted EM space as well and now the breakout is starting to look like a bull trap with a potential of more downside. Perfect example is Hong Kong’s HSI, which has now reversed all of its recent gains and looks rather bearish.

Chart 3: US small caps could now be forming a more meaningful top!

Russell 2000 vs II Bears Source: Short Side of Long

  • Summarising various the equity sentiment survey readings for the month, we can observe in the chart above that despite the fact that bullish sentiment readings aren’t extreme or exuberant, we continue to see complacency rule. Russell 2000 started its topping pattern as Federal Reserve announced its taper program at the beginning of the year. The index has recently failed to confirm new highs with S&P 500 and Dow Jones, as it seems that small caps are struggling with reduced liquidity. As already mentioned on my blog, I have been short the small cap index since middle of September, with a tight stop loss and expect possible further downside as long as there is a lack of bears (Refer to Investor Intelligence chart above). Majority of the other sentiment surveys such as Consensus Inc, Market Vane and NAAIM also portray a similar condition where bulls aren’t extreme, but investors still do not fear a major stock market fall.

Chart 4: 17 month streak of stock inflows seems to be coming to an end

Equity Fund Flows Source: Short Side of Long

  • This month’s fund flows report by ICI showed global equity funds continue to show below average exposure towards equities, with some monthly outflows. After a super run in 2013, where we saw 17 monthly inflows in the row, some selling has taken place with the last 3 out of 4 months being negative. It is true that outflows haven’t been anywhere as extreme as they were during 2011/12 period, nevertheless this could be a sign of things to come. After all, referring to Chart 4, we clearly see a price break down from an uptrend that started in early 2012. Are we finally ready to mean revert and work off some of the gains we have seen in recent quarters?
Chart 5: Financial stress is starting to rise within the market conditions

Financial Stress Index Source: Short Side of Long

  • Summarising this month’s options & volatility conditions, it is worth saying that volatility has picked up in recent weeks as I was away on my trip. First we started seeing volatility rise in currencies, which was later followed by commodities. This is now spilling over into certain parts of equity market and eventually it might even affect the bond market (especially in Eurozone). It seems that not all is well with the markets and most likely with the global economy. St Louis Financial Stress Index is now also picking up and breaking out on the upside (refer to Chart 5). Various credit spreads are also an indication there could be trouble ahead. This is definitely a worrying sign, and together with the elevated Skew Index (see the chart below), it seems that options traders are starting to price in some risk. Caution is advised.
Chart 6: Options traders continue to price a probability of a large decline

Skew Index Source: SentimenTrader (edited by Short Side of Long)

Chart 7: Leveraged players remain long stocks hoping for more gains… 

NYSE Margin Debt Source: Short Side of Long

  • According to NYSE’s latest monthly report, investor margin debt increased by less then $3 billion to $463.02 billion. Majority of the market participants look at this indicator for clues regarding a possibility of a market top. Thinking goes along the lines that historically, margin debt tends to peak out several months before the stock market tops. While this has been true in 2000 and 2007, it did not work always work so well (remember that no indicator is perfect). Personally, I think what is more important is to cross-reference indicators together. For example, even though leveraged players remain long the stock market with hopes of more gains to come, various other indicators are currently warning us of a possible correction ahead (including stock market breadth not discussed in this article).

Cash & Bonds

Chart 8: Retail investors continue to hold incredibly low levels of cash!

AAII Cash Allocations Source: Short Side of Long

  • Recent monthly AAII Asset Allocation Survey cash exposure rose only ever so slightly towards 16.5%, compared to last months reading of 16.0%. I have stated this before and it is worth saying it yet again: usually low cash levels have almost always signalled intermediate stock market peaks and eventually this “teflon market” will be impacted like others have. Moving along to other cash indicators, this months Merrill Lynch Fund Manager Survey cash exposure remains decently high at the level of 4.6% (usually I regard a sell signal around 3.6% and a buy signal at 5.0%). The question is why are fund managers cash levels so high and yet the US market has barley corrected? Personally, I think the answer is linked to weakness in various other global assets, with US the only out-performer.

Chart 9: Funds refuse to overweight bonds in anticipation of rate hikes

Merrill Lynch Fund Managers Bond Weighting Source: Short Side of Long

  • This months Merrill Lynch Fund Manager Survey bond exposure came in at 60% underweight, relative to last months reading of 62% underweight. We have seen an interesting divergence between a rally in bonds and reluctance of exposure towards them by fund managers for majority of 2014. My personal take on this is that fund managers continue to expect an interest rate hike by the Federal Reserve and therefore remain heavily underweight bonds, similar to the last business cycle between 2003-07 (clearly seen by referring to the chart above).

Chart 10: Bond fund inflows have started to stalled in recent months…

Bond Fund Flows Source: Short Side of Long

  • This month’s fund flows report by ICI showed taxable bond funds had estimated inflows of only $1.28 billion for the month of September. This compares to a total estimated inflows of only $1.15 billion for the month of August. It seems that fund flows for both stocks and bonds have slowed or even stalled in recent months. Are market participants worried about the end of yet another QE program and a potential Fed rate hike? It seems that at least some investors are acting rather cautiously with new money right now.

Chart 11: Speculators continue to hold small bearish bets on Treasuries

Treasury Bond COT Source: Short Side of Long

  • This month’s commitment of traders reports shows that small speculators still remain slightly bearish on the Treasury Bond market. If we refer to the chart above, we can see that current contracts stand at -10,344 net shorts. This compares to last months reading of -8,956 net short contracts. This is a far cry from pessimistic positioning seen at the end of 2013, or for that matter the optimistic positioning seen in middle of 2012. I have been very surprised by small speculators (dumb money) and their reluctance to chase the bond market prices higher. We haven’t seen any meaningful long positions since the middle of 2012 and it’s as if the huge outperformance by Treasuries has been completely missed by the majority this year.

Commodities

Chart 12:  Managers are starting to get bearish on commodities again… 

Merrill Lynch Fund Managers Commodity Weighting Source: Short Side of Long

  • This months Merrill Lynch Fund Manager Survey commodity exposure came in at 14% underweight, relative to last months reading of only 5% underweight. It seems that global fund managers jumped on the commodity rally that occurred in first half of the year, however their timing terribly lagged the actual price. Consider that by August the survey found global fund managers to be only 5% underweight commodities – quite a bullish stance relative to last couple of years. At the same time, the price of all major raw materials was already slipping and to this day it still continues to do so. Now we find that allocations are a long way from panic extremes and yet commodities are breaking down towards 5 year lows. This could signal potentially more downside to come before sentiment gets bearish again.

Chart 13: Commodities are breaking down as funds rush out for the exit!

Commodities COT Source: Short Side of Long

  • This month’s commitment of traders reports showed that hedge funds and other speculators still continue to cut their net long exposure towards commodities. Custom COT total contracts currently stand at 115,860 net longs, compared to last months reading of 260,470 net longs. As commodity prices break their major support level, hedge funds are rushing for exits. We are now getting very close to a condition where hedge fund community might turn net short on raw materials, something which we didn’t even see during the Lehman panic.

Chart 14: Agricultural price downtrend since ’11 as funds sell everything

Agricultural COT Source: Short Side of Long

  • Agricultural commodities have been slaughtered since May of this year. Whether we are looking at grains or softs, just about everything has fallen in dramatic fashion. The only survivor seems to be Coffee, which has done quite well due to major supply issues coming out of Brazil. Observing the Rogers Agricultural index, which is probably the most balanced of all Ag indices, it has been under huge selling pressure in the last 3 months and still remains in a downtrend since early 2011 (approaching four years now). The recent sell off is definitely looking like a liquidation, which from a contrarian point of view usually (but not always) marks a major low. Judging by the COT positioning, bulls have been completely shaken out and in certain cases like Wheat (refer to chart below) short bets are incredibly high! A tradable rally could be just around the corner!

Chart 15: Short bets on Wheat are at levels associated with major lows!

Wheat COT Source: Short Side of Long

Currencies & PMs

Chart 16: US Dollar Index is up 12 weeks in the row & funds are pilling in

US Dollar COT Source: Short Side of Long

  • This month’s commitment of traders reports have shown a huge increase in positioning towards the US Dollar. Custom COT total seen in the chart above currently stands at $37.1 billion of net long contracts, compared to three months ago when it stood at only $7.8 billion of net long contracts. Majority of the greenback bullish bets are coming from the Euro and Yen shorts, while speculators are now also turning bearish on the commodity currencies too. The US Dollar Index has rallied for 12 straight weeks and is fast approaching a major resistance zone around 89. While further upside towards resistance is possible in the short term, I would argue that the greenback will soon be going through a correction or consolidation period.

Chart 17: Yen is extremely oversold & approaching an important support

Japanese Yen Performance Source: Short Side of Long

      • If you have been a regular follower of this blog, you would have noticed a consistent focus on the Yen over the last few months. This is because I believe that a major rally in a form of a short squeeze could be at hand. The currency is down -7.7% over the last 3 months alone (refer to chart above) and over -30.1% in the last 36 months or 3 years. This indicates extremely oversold conditions from which a rebound could occur (note that no indicator works 100% of the time). Furthermore Yen now finds itself at an important support level, while sentiment surveys and short contracts on the currency are signalling extreme negativity. Everywhere I’ve been on my trip and everyone I talked to loves to hate the Yen right now (apart from only one person), therefore over the coming days or weeks I might just do the opposite and buy the currency.

Chart 18: Australian Dollar has fallen sharply over the last few weeks… 

Australian Dollar COT Source: Short Side of Long

  • Over the last 12 weeks, we have been in a period of universal Dollar strength and it seems that nothing has been spared. Therefore, it also shouldn’t be surprising to see the Australian Dollar under strong selling pressure, similar to majority of the other global currencies. I originally shorted the Australian Dollar all the way back in late 2012 as hedge funds held record bullish bets on the currency. As a wise man once taught me “when everyone is on one side of the boat, you should go to the other side for a while.” I added to those positions recently as hedge funds started buying the Aussie yet again around 94 cents and have been lucky to catch a mini-crash in recent weeks. The currency is now approaching a major support level, which is between 80 to 83 cents (80 cents is multi-decade important pivot). I do not know if we will get there but if we do, I just might consider covering my shorts.

Chart 19: Gold is breaking below the important support level at $1,200 

Gold COT Source: Short Side of Long

  • This month’s commitment of traders reports have shown continual and steady decrease in Precious Metals net long positioning. Gold COT stands 60,729 net long contracts (16% of OI) for the month of September, compared to last months level of 103,707 (28% of OI). In the Silver market, COT stands at 15,461 net long contracts (9% of OI), compared to last months level of 32,295 (20% of OI). I warned time and time again that a huge build up in net long positioning around July will most likely lead to further downside as the PMs bear market is not yet finished and as we can clearly see from the chart above (and below) both Gold and Silver are now breaking their major support zones.

Chart 20: Silver is now 66% from its all time high and extremely oversold

Silver Performance  Source: Short Side of Long

  • While sentiment and futures positioning in Gold is not yet at major extremes associated with a buying opportunity, Silver is kind of getting there. Now, that doesn’t mean that Silver’s sentiment won’t get even worse before the price puts in a proper low. As we can clearly see from the chart above, a major support zone sits around $15 per ounce and we might just get there in coming months. However, also keep in mind that the metal is already extremely oversold as its down 22% over the last 3 months and 66% over the last 3.5 years. Furthermore, hedge funds are in major group-think mode on Silver, with short bets reaching yet another record high. So, I am honestly thinking that a short squeeze could occur at anytime in this metal.

Chart 21: Short positions are once again at record highs in Silver market 

Silver Short Selling Source: Short Side of Long

A Quick Update

Firstly, I have to apologies for lack of posts over the last several days. As few of you would have already guessed, I am traveling around Asia as I write this. And because I have been accompanied by some good friends, it is very hard… if not impossible… to get any work done. Some great food, lots of alcohol, late nights and many good laughs means there is hardly any time for work (or sleep haha). Typhoon in Hong Kong tried to stop us at our tracks, but it did not succeed.

Over the coming weeks I will be visiting Seoul, Singapore and hopefully even Tokyo if possible (I am not sure about the last one just yet). Email me if you would like to catch up and I can tell you my dates and cities more precisely!

Chart 1: Extremely low stock complacency with fewest bears since 1987 

 Source: Pension Partners

Ok quick update on the markets. Right now I am watching variety of markets, but mainly US stocks, Emerging Market stocks and Precious Metals. Emerging market stocks have been stuck in a range since October 2011, or even since early 2010 depending on how you look at it. These indices are trading at very compiling and attractive valuations. GEMs have been trying to break out in recent months and I have China & Russia closely on my watchlist.

However, the problem is that US stocks are rather very overpriced and sentiment extremely optimistic (refer to Chart 1). Furthermore, US technical breadth keeps deteriorating with fewer and fewer 52 week highs. When we look at Nasdaq and Russell 2000 components, a lot of stocks are already down over 20% and well into a bear market. Breadth is thinning, which to me signals that liquidity is drying up. Caution is advised.

Chart 2: Traders are once again turning very negative on Gold & Silver! 

 Source: Mark Hulbert

It seems that many market participants have been running into USD which has affected prices of all commodities including Gold. My newsletter readers would know that I have been shorting Gold since $1310 and fully hedged my silver core holdings by shorting Silver at $21. This trade, together with long USD – short Aussie has been working very well in recent weeks. However, on the opposite side of the sentiment spectrum, Gold is becoming quite disliked and heavily shorted by traders (refer to Chart 2).

Does that mean I will close my shorts / hedges? I am not sure. I might if sentiment gets even worse. However, I still continue to believe that after a near term rebound in PMs prices, we could keep drifting lower. I am eventually looking for Gold to break below $1190 and Silver below $18.50. My fund remains denominated in US Dollars, which is also benefiting me somewhat, as all the cash I hold is at least not losing purchasing power on relative basis. I guess that just means more quality beer to be consumed in Singapore with some friends!

Market Movers & Shakers!

Here are some interesting charts in no particular order. Market conditions remain quite interesting for both traders and investors in recent months. We have been discussing and trading US Dollar strength, Euro weakness, Treasury yield curve flattening, Grains in a crash mode, reversal in Oil prices, euphoric rise of the US tech sector, Gold and Silver potentially breaking down lower and lack of bears in the stock market as almost no one wants to fight central banks.

Chart 1: Dollar Trade Weighted Index approaching 52 week new highs

US Dollar vs 200 MA Source: Short Side of Long

Chart 2: Treasury 5 Year yield is approaching a breakout on the upside

US Treasury Yield Curve Source: Short Side of Long

Chart 3: Corn prices are going through the biggest bear market since ’96

Corn Performance Source: Short Side of Long

Chart 4: After a failed breakout Brent Crude Oil has started its correction

Brent Crude Oil Source: Short Side of Long

Chart 5: Nasdaq 100 at 14 year resistance from the Tech bubble days

Nasdaq vs 200 MA Source: Short Side of Long

Chart 6: Gold price consolidation might be ending with a breakdown…

GLD vs Physical Holdings Source: Short Side of Long

Chart 7: Silver is trading in a narrow range for more then a year now 

Silver COT Source: Short Side of Long

Chart 8: Bearish capitulation as hardly any one fights the central banks

Investor Intelligence Bears Source: Short Side of Long

Chart 9: ECB starts its money printing program as Euro collapses lower

Euro COT Source: Short Side of Long

July Sentiment Summary

Equities

Chart 1: Managers exposure towards equities is now “all-in” mentality!

Merrill Lynch Fund Managers Equity Weighting Source: Short Side of Long

  • This months Merrill Lynch Fund Manager Survey equity exposure came in at 61% overweight, relative to last months reading of 48%. Managers have pushed their exposure towards global equities to second highest levels in surveys history. Last time we saw exposure this extreme was in February 2011, just as the Euro Crisis was starting. As we approach the time of the year usually considered seasonally weak and the Federal Reserve finishes up the taper, equities look rather vulnerable. If you believe in surveys contrarian signals, today is probably not the best time to be buying equities… to say the least!

Chart 2: Bullish sentiment isn’t euphoric, but complacency dominates

Market Sentiment Source: Short Side of Long

  • Summarising various the equity sentiment survey readings for the month, we can observe in the chart above that bullish sentiment has pulled back from last months readings. In general, bullish sentiment hasn’t been all that extreme on either end, but the major story in the recent months has been the lack of volatility and total complacency, which has therefore lead to complete lack of bears. Other sentiment surveys such as Consensus Inc, Market Vane and NAAIM actually show a much higher level of bullishness that usually link to a possibility of a price pullback.

Chart 3: July is shaping up to be 1st major monthly outflow in two years

Equity Fund Flows Source: Short Side of Long

  • This month’s fund flows report by ICI showed global equity funds showed a first estimated monthly outflows of -$9.4 billion, after so many consecutive monthly inflows. The chart above contains red dots, which show time periods in the last seven year history where retail investors pulled money out of mutual funds for the first time, after several monthly consecutive inflows. First occasion was in early 2007, just as the market was near its peak. Second occasion was into late 2009, just after a powerful rebound. Markets stalled over the coming months. Third occasion was into middle of 2011 just as the market was near its peak. And finally, here we are today…
Chart 4: Skew Index has remained above 135 for the last several weeks!

Skew Index Source: Stock Charts (edited by Short Side of Long)

  • Summarising this month’s options & volatility conditions continue to remain in a very complacent zone. Obviously, this isn’t a major worry for the time being, until volatility starts picking up and investors start getting worried. A market trader with a keen eye should have already noticed a pick up in the VIX, as it diverges with large cap indices such as S&P 500. Furthermore, while not perfect, another indicator is also flashing warning signals. Skew Index, seen in the chart above, is used to predict a possible pick up in volatility. The 10 day moving average of the indicator has remained above 135 for several weeks now, which according to CBOE indicates almost 12% chance of a 2 standard deviation move.
Chart 5: Margin debt peak postponed as the stock market rally continues

NYSE Margin Debt Source: Short Side of Long

  • According to NYSE’s latest monthly report, investor margin debt increased by $25.8 billion to $464.31 billion. While we did see two consecutive monthly declines in leverage, margin debt has now recovered in a very robust fashion. Without a doubt, the extremes still remain in place and warn that investors are overly exposed to equities, however there is yet no proper sign of de-leverging (as seen by red circles in Chart 5).

Cash & Bonds

Chart 6 & 7: Retail investors push cash exposure towards lower levels!  

AAII Cash Allocations Source: Short Side of Long

  • Recent monthly AAII Asset Allocation Survey cash exposure fell towards 17.1%, compared to last months reading of 19.2%. As stated last month, usually low cash levels have almost always signalled intermediate stock market peaks, however the current rally has earned a nickname of “teflon market” and therefore no extremes have yet impacted the price of the uptrend. Moving along to other cash indicators, this months Merrill Lynch Fund Manager Survey cash exposure remained at the same level of 4.5%. With no change, readers should refer to last months report to view the chart again.

Chart 8: Managers further pressed their underweight bond exposure… 

Merrill Lynch Fund Managers Global Bond Weighting Source: Short Side of Long

  • This months Merrill Lynch Fund Manager Survey bond exposure came in at 64% underweight, relative to last months reading of 62% underweight. The bond market continues to rally and yet global fund managers exposure towards this particular asset keep falling. Merrill Lynch explains this by stating that a large majority of managers believe central banks are now anticipate a rise in short term interest rates. Moreover, investors should take notice of the fact that the exposure spread between long equities and short bonds is at one of the highest levels in surveys history.

Chart 9: Fund inflows continue with corporate bonds near record highs

Bond Fund Flows Source: Short Side of Long

  • This month’s fund flows report by ICI showed taxable bond funds had estimated inflows of $8.17 billion in the month of July. This compares to a total estimated inflows of $9.7 billion in the month of June. Abundance of recent commentary has focused on the superb performance corporate grade and junk grade bonds have achieved over the last several quarters, and the chart above shows the ongoing capital flowing towards corporate bonds.

Chart 10: Despite this years powerful rally, funds aren’t positioned long!

Treasury Bond COT Source: Short Side of Long

  • This month’s commitment of traders reports shows that small speculators remain rather neutral in the Treasury Bond market. If we refer to the chart above, we can see that bearish bets really stood out in August 2013 and again in December 2013, both marking intermediate lows for the Long Bond. However, despite a very powerful recovery rally this year, speculators have not yet turned net long. This is quite puzzling in a similar way that is also seen in the Merrill Lynch FMS, where exposure to bonds has been falling despite rising prices.

Commodities

Chart 11: Fund manager exposure towards commodities has improved 

Merrill Lynch Fund Managers Commodity Weighting Source: Short Side of Long

  • This months Merrill Lynch Fund Manager Survey commodity exposure came in at 15% underweight, relative to last months reading of 18% underweight. Commodities have undergone a strong rally in the first half of the year, as they outperformed equities and bonds. Therefore, it is no surprise that managers have been chasing the price by improving exposure towards this asset. Continuous Commodity Index has now almost completely reversed the rally, so I would anticipate a deterioration in commodity exposure from global funds in coming months. Furthermore, from a pure technical perspective, commodity index in Chart 11 failed to break out and post a higher high, so at this point we officially still remain in a downtrend.

Chart 12: Funds are getting out of Agricultural commodities in a hurry!

Commodity COT Source: Short Side of Long

  • This month’s commitment of traders reports showed that hedge funds and other speculators  continue to cut their net long exposure towards commodities. Custom COT total net long contracts (refer to the chart in last months report) stand at 393,000, compared to last months reading of 599,000 net long contracts. If we observe Chart 12, we can clearly see that the 3 month rate of change in net long contracts is one of the lowest in the last six years. In plain English, hedge funds are cutting bullish bets on commodities at an extremely fast rate and the main culprit for this has been the Agricultural sector.

Chart 13: Agricultural sentiment surveys have completely collapsed!!!

Grains Sentiment Source: SentimenTrader

  • I have been focusing on the extremely disliked and disowned grains sector on the blog in recent posts. As it currently stands, futures positioning as well as sentiment surveys are pointing to possibility that panic selling is very close to ending. Corn, Wheat and Soybeans are extremely oversold and over the last 3 months, have declined by 26.9%, 28.3% and 17.4% respectively. Even more importantly, many of these agricultural commodities are having some of the worst two year returns in decades. Corn is down 54% over the last 24 months, while Wheat has suffered a 42% loss within the same time period. At current depressed prices, it is hard to see farmers rushing out to build up global inventory levels in coming years. Therefore, keep a close eye on the price, as we could be very close to a bottom.

Currencies & PMs

Chart 14: USD has held support & might be ready for another leg up… 

US Dollar COT Source: Short Side of Long

  • This month’s commitment of traders reports have shown a slight increase in positioning. This months custom COT total stands at $12.8 billion of net long contracts, compared to last months level of $10.9 billion of net long contracts. Majority of the bullish bets are coming from the Euro Dollar exchange rate pair, where speculators see further weakness for the European currency. According to the chart above, sentiment isn’t anywhere near extremes just yet, as we have Dollar shorts held against the Pound, Loonie, Aussie and Kiwi. As always, higher prices in the USD Index will entice more speculators and trend followers to chase prices higher.

Chart 15: Japanese Yen is about to make a large move in either direction

Japanese Yen COT Source: Short Side of Long

  • Over the last couple of months, Japanese Yen has been identified on this blog as a very decent opportunity, more so for traders then longer term investors. The volatility on the currency is at a multi-decade lows, and periods of low volatility are usually preceded by periods of high volatility. The technical price pattern resembles a pressure cooker right now and something has to give very soon. Disclosure: Short Side of Long newsletter subscribes would already know that I have been expecting the Yen to break out on the upside, however as of Friday I have been stopped out of the trade for a very small -0.1% loss (I tightened my stop loss in accordance with the triangle pattern). From a short term trading perspective, I am now ready to go either long or short as soon a first real hint is given.

Chart 16: Caution is advised as funds pile back into Precious Metals… 

Gold COT Source: Short Side of Long

  • This month’s commitment of traders reports have shown substantial increase in Precious Metals net long positioning yet again. Gold COT stands 161,200 net long contracts (39.5% of OI) in the month of July, compared to last months level of 131,600 (33.5% of OI). In the Silver market, COT stands 58,300 net long contracts (35.9% of OI), compared to last months level of 42,900 (27.1% of OI). As we can clearly see in Chart 16, Gold is consolidating in a sideways pattern right now. While bulls have been piling into the sector and busy pushing prices higher, they have failed to push the price into higher highs pattern known as an uptrend. The current level of bullish sentiment is extremely high for a market that remains in a price downtrend, so I would advise caution right now. Obviously, I would change my mind on the current short term direction, if and when Gold was to break above $1,400 per ounce.

June Sentiment Summary

Equities

Chart 1: Fund managers still holding above average exposure to stocks

Merrill Lynch Fund Managers Equity Weighting Source: Short Side of Long

  • This months Merrill Lynch Fund Manager Survey equity exposure came in at 48% overweight, relative to last months reading of 37%. Managers remain quite bullish as stock exposure is still only modestly lower then the 60% overweight we saw in September 2013 (2nd highest reading since surveys inception). Also to note, fund managers have been extremely overweight global equities without a mean reversion back below 28% for longer than any other period in survey’s history. In other words, managers remain persistently bullish for almost two years now. As a side note, this closely links to the fact that the S&P 500 has traded above the 200 MA for almost 85 weeks now (same time frame).

Chart 2: Complacency remains major worry with lack of bearish traders!

Sentiment Surveys Source: Short Side of Long

  • Summarising various the equity sentiment survey readings for the month, we can observe in the chart above that bullish sentiment is once again approaching extremes. However, by far the most important story is the lack of bearish investors, non-existent volatility and very low volumes. With 4 week readings lower than 1 standard deviation below the mean, both AAII and II surveys are signalling that investors are very complacent, to say the least. Other sentiment surveys confirm these conditions including NAAIM surveys net long equity 4 week exposure at 88% and Consensus Bullish % survey showing 71% bulls this week (all in the high side).

Chart 3: Positive streak in global equity fund flows has taken a breather

Global Equity Fund Flows Source: Short Side of Long

  • This month’s fund flows report by ICI showed global equity funds had estimated inflows of $1.39 billion in the month of June. This compares to a total estimated outflows of -$2.2 billion in the month of May. After 16 consecutive monthly inflows, global equity funds have seen the positive streak broken in May with a slight outflow. However, with the market continuing its rally, you can bet your bottom dollar that fund managers around the world are chasing the momentum ever so higher. Therefore, further inflows in coming weeks are to be expected. The main question still remains: how wise is it to be piling into a five year aged bull market?

Chart 4: Margin debt has peaked, but the stock market rally continues… 

NYSE Margin Debt Source: Short Side of Long

  • According to NYSE’s latest monthly report, investor margin debt decreased by $13.1 billion to $437.2 billion. Month of May was the second consecutive monthly decline in investor leverage, after the intermediate peak in February of this year at a record $465.7 billion of debt. The extremes in the nominal raw data seen above is also confirmed by margin debt readings adjusted for inflation, as well as relative to the US GDP. Nevertheless, the stock market has decided to in ignore yet another warning flag, as it moves ever so higher towards new records.
Chart 5: Options traders have been favouring purchases of calls recently

Put Call Ratio Source: Short Side of Long

  • Summarising this month’s options & volatility conditions can be done with one word: complacency. Volatility on many asset classes, and not just US stocks, remains very low; volumes are anaemic and have been for awhile; while traders continue to favour purchases of calls relative to puts in most cases (especially equity p.c. ratio not shown here). Various corporate bond spreads, credit default swap indices and interbank swap rates are all at historically low levels. It seems that the consensus isn’t worried about much, but interestingly enough certain options traders are once again bidding up the Skew Index (chart below). What are they worried about and what could possibly go wrong?
Chart 6: Skew Index rises above 140 for only the 5th time in its history… 

Skew Index Source: Bar Chart (edited by Short Side of Long)

Chart 7: Equities as a percentage of financial assets is above ’07 highs!

Equities As Percentage Of US Household Financial Assets Source: Short Side of Long

  • Quarterly report by Federal Reserve on US household balance sheets shows a slight, but continual increase in equity exposure relative to total financial assets. On average, US households today hold 30.6% of their financial assets in stocks compared to last quarters reading of 30.4%. Having said that, the exposure has increased by a whopping 12.4 percentage points in a five year period from March 2009 quarter until March 2014 quarter. What’s even more interesting, is that current exposure has only been bettered once in Jan-Mar 1969 and 11 quarters between early 1998 and late 2000. Both of these periods marked the beginning of a long sideways under-performance by US stocks.

Cash & Bonds

Chart 8 & 9: Hedge fund cash levels are high, while retail investors low… 

AAII Cash Levels Merrill Lynch Fund Manager Cash Balance Source: Short Side of Long

  • Recently monthly AAII Asset Allocation Survey cash exposure remained low at 19.2%, compared two last months readings of 17.4% and 17.1%. Since the stock rally started in October 2011, retail investors have been holding an extremely low levels of cash. This usually occurs near intermediate market peaks, however the current rally seems unstoppable right now (refer to the chart above). Contrasting retail investors, fund managers are currently overweight cash. This months Merrill Lynch Fund Manager Survey cash exposure came in at 4.5%, relative to last months reading of 5.0%. As we can see in Chart 9, last months reading was close to 1.5 standard deviations away from a decade long mean, which is usually associated with long term buying opportunities.

Chart 10: Fund managers remain underweight bonds despite strong rally

Merrill Lynch Fund Manager Bond Weighting Source: Short Side of Long

  • This months Merrill Lynch Fund Manager Survey bond exposure came in at 62% underweight, relative to last months reading of 55% underweight. Despite a powerful six months rally in bonds, where long duration Treasuries outperformed the S&P 500, managers remain extremely bearish on the asset class. Why is this? It seems that fund managers are positioned this way because they are not paying attention to the market price, and instead are anticipating a rate hike from global central banks like Federal Reserve, Bank of England, Bank of Canada and Reserve Bank of Australia.

Chart 11: Strong 1st half rally in bonds has improved sentiment surveys

Bond Sentiment Survey Source: SentimenTrader

  • Summarising various bond sentiment surveys for the month, we can observe in the chart above that Bullish Consensus has recovered meaningfully from the depressed sentiment of 2013. While readings are approaching extremes, I’d argue that the cautionary sell signal won’t be triggered until we see at least 75% bulls, relative to the current reading of 63%. Other sentiment surveys do confirm the mean reversion in sentiment from negativity seen in 2013, but are not as bullish as the chart above.

Chart 12: Bond funds are recording a sixth consecutive monthly inflow!

Bond Fund Flows Source: Short Side of Long

  • This month’s fund flows report by ICI showed taxable bond funds had estimated inflows of $4.83 billion in the month of June. This compares to a total estimated inflows of $10.2 billion in the month of May. Last years panic, coupled together with huge retail investor outflows, marked a bottom in corporate bond space. On total return basis, corporate bond ETF is now making new highs as we post a sixth consecutive monthly inflow. If you paid attention to the blog throughout Q4 of 2013, I was constantly drawing similarities between outflows we saw in ’08 relative to outflows we saw last year. From a contrarian of view, both ended up marking important lows.

Chart 13: Speculators have covered their shorts, but aren’t bullish bonds

Treasury Bond COT Source: Short Side of Long

  • This month’s commitment of traders reports shows that small speculators have covered just about all net short positions on the Treasury Bonds. Bears were pressing hard against bonds in August 2013 with -69,809 net short contracts, and again in December 2013 with -68,633 net short contracts. From a contrary standpoint, both of these dates marked what looks to be like a short term technical double bottom in the Treasury market. It is also worth stating that despite the fact speculators have covered shorts, we do not yet see any bullishness with net long bets.

Commodities

Chart 14: Global fund managers continue to underweight commodities!

Merrill Lynch Fund Managers Commodity Weighting Source: Short Side of Long

  • This months Merrill Lynch Fund Manager Survey commodity exposure came in at 18% underweight, unchanged from last months reading. Despite a slight improvement in positioning, as seen in the chart above, managers still continue to dislike commodities and have persistently done so since late 2012. Technically speaking, Continuous Commodity Index looks to be in a sideways consolidation zone, but I find it very interesting that commodities on equal weighted basis still trade at levels around 2008 peak (which is very high relative to a decade ago) and yet sentiment is extremely negative.

Chart 15: Hedge funds have started cutting their net long positioning… 

Commodity COT Source: Short Side of Long

  • This month’s commitment of traders reports showed that hedge funds and other speculators have started slashing net long contracts. Custom COT total right now stands at 599,344 net long contracts, compared to last months reading of 746,507 net long contracts. During the current rally from December 2013 lows, net long buying peaked in the first week of May as contracts approached a one million level (956,667). While hedge funds aren’t completely shaken out just yet, looking at it from another perspective, net long positioning has decreased by over 330,000  contracts over a three month rolling period and yet the price has barley sold off. Is this a positive sign of the continuation of the current commodity rally?

Chart 16: Industrial metals like Copper are yet to participate in the rally 

Copper COT Source: Short Side of Long

  • We have been focusing on the base metals quite a lot in recent blog posts. Even during the first Q1 of 2014, I have been anticipating a possible outperformance in a disliked industrial metals space. So far, majority of the sector has been relatively flat (apart from Nickel and Palladium). However, the poster boy of base metal sector, Copper (together with Aluminium not shown here), could now be joining the rally. If we observe the chart above, we could make an assumption that Copper has a decent chance of breaking out from its downtrend, despite all of the negativity coming out of China. Recent large short bets could be in for a squeeze, so watch this metal in coming weeks and months.

Currencies & PMs

Chart 17: Funds remain slightly bullish USD despite continual Fed taper

US Dollar COT Source: Short Side of Long

  • This month’s commitment of traders reports have shown modest increase in US Dollar net long positioning, despite a slight trim over the last week or two. This months custom COT total stands at $10.85 billion of net long contracts, compared to last months level of $5.95 billion of net long contracts. In summary, even though positioning is slightly bullish I would describe it as neutral at present. Technically speaking, the support line seen in the chart above has prevented greenback’s decline, with prices consolidating over two years now. Traders should pay attention to the index in coming weeks and months, as the range is getting ever so narrower. Volatility will eventually pick up…

Chart 18: Canadian Dollar bears squeezed as currency stages recovery!

Canadian Dollar COT Source: Short Side of Long

  • Middle of 2011 marked an important peak when it came to the so called “inflation trade” as we can see in the charts of commodities, emerging markets or currencies like the Loonie seen above. The Northern American currency has now been in a downtrend for more then three years, but the trend recently changed? The mini-panic sell off into early 2014 shook out a lot of bulls and now the net short COT positions are scrambling for cover. Hedge funds and other speculators are close to turning net long for the first time since late 2012 just as the currency finds its downtrend resistance line. Could the Loonie be possibly discounting a potential rate hike by the BoC in coming months, the same way British Pound is?

Chart 19 & 20: Hedge funds have been covering their short bets on PMs!

Precious Metals Long COT Precious Metals Short COT Source: Short Side of Long

  • This month’s commitment of traders reports have shown substantial increase in Precious Metals net long positioning. Gold COT stands 131,607 net long contracts (33.5% of OI) in the month of June, compared to last months level of 78,638 (19.8% of OI). In the Silver market, COT stands 42,897 net long contracts (27.1% of OI), compared to last months level of 14,230 (9.1% of OI). The two charts above show cumulative gross longs and shorts in Gold & Silver market. We should be able to observe that while majority of the recent changes in the COT have come from short covering (especially in Silver), there has also been some buying interest as well. Technically speaking, PMs sector still remains in a downtrend and have to overcome quite a few resistance levels before a bull market is to return.

Group Think!

Chart 1: Investors turn very bullish this week, as S&P 500 breaks out… 

Investor Intelligence Bulls Source: Short Side of Long

Investors got very optimistic this week, with more then 62% of investor intelligence newsletter advisors expecting higher prices in the future. Bearish readings are also historically low too. With such high bullish readings, we could be watching a false break out in S&P 500… stay cautious when group think is in fashion!

Lack of Volatility, Volume & Bears

Chart 1: Volatility Index is hitting rock bottom complacency levels… 

Volatility Index Source: Short Side of Long

I will be updating sentiment conditions properly and in-depth, as I usually do during the first weekend of every month. However, I thought it was prudent to open up a discussion as early as today on a phenomenon majority of you readers have most likely already noticed. Lets call this condition a lethal and dangerous cocktail mix of rock bottom complacent volatility, extremely low volume readings and the lack (or even better: non-existence) bearish investors. While you glance over Charts 1 to 3, I will quickly cover these three cocktail ingredients.

Firstly, historically speaking, extremely high volatility into a major sell off has almost always been a great buy signal if one exercises patience and some kind of timing skills. On the other hand, while low volatility isn’t necessarily a sell signal, rock bottom complacency seen today resembles conditions just prior to the Global Financial Crisis of 2007/09. Low volatility is dangerous for many reasons, including the fact that traders take on more and more leverage to turn minuscule market moves into decent returns. It is true that for now volatility could stay artificially low, as long as central banks continue to their super-easy monetary programs.

Chart 2: …while US stock market volume is currently at six year lows!

S&P 500 Volume Source: Short Side of Long

Secondly, majority of the time, extremely high volume into a major sell off been a great buy signal if one exercises patience and some kind of timing skills. During true buying opportunities (market bottoms) we know retail investors (dumb money) are dumping shares because of high volume spikes, known as panic selling. And in similar fashion to volatility, low volume isn’t necessarily a sell signal, but it does portray lack of commitment on the behalf of market participants. Chart 2 clearly shows that market peaks occur during low volume and recent readings are at six year lows!

Finally, for the stock market to keep climbing, there needs to be a wall of worry in place. Various financial commentary will describe this condition in many different ways, using many different indicators. Personally, I like to use Investor Intelligence Bearish readings seen in Chart 3. The more bears we have declaring negative views on asset prices, the more fuel we have to climb higher as prices bottom. As these investors realise they have been wrong and start putting their cash to work, one by one is seen buying at higher and higher prices. However, once we run out of bears, we also run out of fuel and the wall of worry disappears.

Chart 3: Where are the bears? Previous low readings have led to peaks!

Investor Intelligence Bears Source: Short Side of Long

The caveat here, relative to 2007 peak, is that fundamentals are much worse with demographics deteriorating, interest rates at or near record lows, global debt levels suppressing 2007 highs by over 30%, central bank balance sheets are now loaded with absolute garbage and economic recovery is the worst since World War 2 (despite multi-trillions in stimulus). Finally, employment conditions have no improved at all for over 5 years now, despite the rubbish commentary in the media.

April Sentiment Summary

Equities

  • Recent AAII survey readings came in at 35% bulls and 27% bears. Since the last report in March, AAII bullish readings have fallen ever so slightly, while bearish readings have remained pretty much unchanged. However, turning our attention to the less volatile AAII monthly allocation survey, we can see the investors continue to add exposure towards equities, while reducing their cash levels, a major warning signal of complacency.

Chart 1: Extremely low level of bearish advisors usually signals a top!

Investor Intelligence Bears Source: Short Side of Long

  • Recent Investor Intelligence survey levels came in at 51% bulls and 19% bears. Over the last four weeks, bullish readings have pulled back slightly while bearish readings have slowly started to rise. Nevertheless, the chart above shows that for 24 weeks in the row, percentage of bearish advisors has remained below 20%. This type of a sentiment condition is very rare and warns of major complacency amongst investment participants.
  • Recent NAAIM survey levels came in at 91% net long exposure, while this weeks intensity was recorded at 150%. Over the last month, fund managers have been rising their exposure towards equities on weekly basis, while the intensity of exposure (difference between the most bullish and most bearish exposure) has stayed extremely elevated at 170% net long when averaged over the last 6 weeks.

Chart 2: Money market funds are signalling high complacency levels…

Money Market Funds Source: Ned Davis Research

  • Recent ICI fund flows reports showed that “equity funds had estimated inflows of $1.23 billion for the week, compared to estimated outflows of $962 million in the previous week. Domestic equity funds had estimated outflows of $267 million, while estimated inflows to world equity funds were $1.50 billion.”  Money continues to flow into the stock market, as seen in this chart  here showing 15 consecutive monthly inflows. This streak is bound to be broken eventually, as a more meaningful correction starts (more likely sooner rather than later).
  • Moreover, the next sell off might not be a correction, but rather a bear market. Chart 2 shows that money market funds have diverged quite a lot from the overall broad equity market value, signalling high complacency levels similar to 1981, 1987, 1998, 2000 and 2007. All of those dates were peaks prior to at least a 20% drop in equity prices and some full blown crashes.

Chart 3: Rydex traders are not only optimistic, they are outright greedy!

Nova Ursa Fund Flow Ratio Source: Short Side of Long

  • Recent Rydex fund flows are rising to higher and higher levels by the day. Rydex traders, usually considered as dumb money, are pilling into US equities at such a fast rate, you might as well call the long trade a “free lunch”. They are so greedy right now, that they are sure the market will rise to higher and higher levels… in their view most likely “a sure bet”. While previous optimistic levels lead to sharp sell offs as seen in Chart 3, the current level of greed just might lead to something even more worrisome.
  • Recent commitment of traders reports (also known as dumb money) showed that speculators have slowly, but surely been closing their net long bets on technology stocks. Hedge funds and other speculators currently hold over just over 74,000 net long contracts, which is a substantial decrease from 113,200 at the start of March. Nevertheless, speculators aren’t anywhere near outright bearish levels yet. Previous months chart can be seen by clicking here.
Chart 4: Margin debt continues to climb higher and higher and higher!

NYSE Margin Debt Source: Short Side of Long

  • According to NYSE, Margin Debt (measure of investor leverage) climbed to yet another record high in February 2014. These days, there isn’t a month that passes by where we don’t learn that leverage is increasing at an almost exponential pace. Official nominal margin debt readings now stands at $465.72 billion, $14.5 billion higher than last month. Inflation adjusted margin debt in todays dollars is seen in Chart 5, while investor net credit levels, currently at record lows, can be seen by clicking here. Thanks to Doug Short for both charts.
Chart 5: Consumer discretionary stocks are under performing the market

S&P 500 vs Consumer Equities Ratio Source: Short Side of Long

  • Side note: I originally warned about the developing weakness in Consumer Discretionary equities all the way back in middle of January. This situation is now developing further, where the Discretionary sectors continues to under-perform both the overall market as well as Consumer Staples sector. The chart above shows S&P 500 vs Discretionary / Staples Ratio, which represents the cyclicals vs defensives performance. Usually, cyclical sectors will turn down first before the market peak, as seen in early 2007 and early 2011. The same is true for the bottoming process too, where cyclical sectors sense the recovery before the market itself, as seen during late 2008 and late 2011. Interestingly, we are once again getting a warning from the ratio above, which could potentially mean that the market is now starting a topping process. Watch carefully!

Bonds

  • The situation has not changed much in the Bond sentiment surveys compared to the March report. As Treasury prices have mainly moved sideways, so has the sentiment. Both Market Vane Bullish Percentage and Consensus Inc survey remain at or close to neutral level. Neither of these surveys is giving us any contrarian signals worthy of a trade nor an investment right now. However, the fund flows towards corporate debt and especially the junk bond market (easily seen with narrowing spreads), is very frothy right now.

Chart 6: Last years panic was a decent buying point for corporate bonds

Bond Fund Flows Source: Short Side of Long

  • Recent ICI fund flows reports showed that “bond funds had estimated inflows of $1.28 billion, compared to estimated inflows of $2.48 billion during the previous week. Taxable bond funds saw estimated inflows of $1.23 billion, while municipal bond funds had estimated inflows of $49 million.” Retail investor panic is usually a signal to buy an asset, and this was once again proven by corporate bond price sell off in 2013 (seen in the chart above). Large fund outflows by the public usually occur near market troughs and this time was no different. The price has managed to bottom and rally somewhat, gifting those contrarians who went against the herd a decent total return (including the yield) for a few quarters now. Interestingly, as the rally continues, the fund flows are back again…

Chart 7: Speculators now hold mild net short bets on Treasury Bonds

Treasury COT Source: Short Side of Long

  • Recent commitment of traders report (also known as dumb money) shows that small speculators have just above closed all of their net short bets against the Treasury Bonds. Recent COT report showed that small speculators now hold only -5,000 net short contracts. Personally, I believe that specs could actually turn net long on the Treasury Bond market if and when the equity market experiences a more significant correction. A warning signal for the equity market could be the inverse correlation with bonds and a possible breakout from the current basing pattern. Watch that neckline closing on the Long Bond!

Commodities

Chart 8: Commodity index reaches resistance as specs build positions!

Commodity COT Source: Short Side of Long

  • The recent commitment of traders reports (also known as dumb money) showed that hedge funds and other speculators continue to remain very bullish towards the overall commodity complex, with exposure reaching over 930,000 net long contracts (custom COT). This is now the highest net long exposure since September 2012, just before the price peaked. Majority of the net long contract building has come from Agricultural and Precious Metal sectors, which have rallied decently over the last quarter. The chart above shows that the equal weighted commodity index has now reached a technical resistance area and its time for consolidation.

Chart 9: Brent Crude Oil is acting very weak despite the commodity rally

Brent Crude COT Source: Short Side of Long

  • As already discussed in a few posts as well as last months sentiment report, several industrial commodities that are economically sensitive are acting rather weak. One of these is Brent Crude, the global barometer for energy prices. As we can see in the chart above, prices peaked out during the Lybian Crisis into May 2011. For the last three years, prices have gone essentially nowhere. Technically, Brent Crude is now at crossroads, with a major price decision looming in coming days or weeks. Pay a close attention to this one, as it could be an important signal for the overall global economy. 

Currencies

Chart 10: Dollar positioning is neutral as price holds important support 

US Dollar COT Source: Short Side of Long

  • Recent commitment of traders reports (also known as dumb money) have shown a gradual decrease in bullish positioning towards the US Dollar. During the last report in early March, cumulative G10 positioning by hedge funds and other speculators stood at $10.3 billion net longs. The sell off that occurred into the Fed press conference shook those net long speculators out completely, with current positioning pretty much at neutral levels (neither long nor short). Comments by Fed Chair(wo)man Yellen have changed the dynamics of the currency markets a bit, with the Dollar bouncing of its support. At the same time the Euro, Pound, Franc and Yen have been rather weak as of late.

Chart 11: Canadian Dollar is one of the more hated currencies right now!

Loonie Public Opinion Source: SentimenTrader (edited by Short Side of Long)

  • Sentiment survey readings on various currencies has been skewed towards European continent strength and Emerging Market weakness, which has sort of created a US Dollar neutrality, so to speak. Having said that, commodity currencies like the Aussie and in particular the Loonie continue to under-perform. As we can see in the chart above, thanks to SentimenTrader, survey readings have now fallen to negative extremes last seen during the GFC and late 2008 panic sell off. Let us not forget that the Canadian Dollar peaked all the way back in middle of 2011 and has been in a bear market for three years now. The currency is down 7.3% over the last 12 months and almost 13% over the last three years (the worst 3 year performance since 1998).

Chart 12: Hedge funds are once again cutting their net long bets on PMs

Gold COT Source: Short Side of Long

  • Recent commitment of traders reports (also known as dumb money) showed hedge funds and other speculators burnt by jumping onto the precious metals too late. Last months report warned that Gold, as well as Gold Miners, were becoming very overbought in the short term and a correction was looming. Interestingly, just before the correction started, specs increased net longs in Gold and Silver substantially. Now… with a price drop, we see those positions closed again. Current Gold hedge fund positioning stands just over 100,000 net longs; while current Silver hedge fund positioning stands at just over 14,500 net longs. Respectively, that is 31.4% net longs as a percentage of open interest in Gold and 18.9% in Silver… not yet close to single digits associated with intermediate bottoms and buying opportunities.

Sentiment Sky High

Chart 1: US Equity market sentiment at highest level since 1987 crash!Market SentimentSource: Barry Bannister / Ned Davis Research

US equity market sentiment, according to the smoothing average from the Investor Intelligence survey data, is currently at one of the highest levels ever in its multi decade history. In his recent March newsletter Barry Bannister warns that, at the beginning of the year sentiment was as bullish as immediately before the 1987 stock market crash. The chart above also shows that a contrarian sell signal is still in play.

March Sentiment Summary

Equities

  • Recent AAII survey readings came in at 41% bulls and 27% bears. Since the last report in early February, AAII readings have recovered back towards neutral levels. Averaged over four weeks or one month to remove volatility, AAII sentiment still continues to remain elevated. Interestingly, the last time this indicator reached oversold levels was all the way back in June 2013, almost a year ago. Since all markets and indicators eventually mean revert, we should expect that the current confidence in the retail investment community will not last forever… it never does.

Chart 1: Newsletter advisors remain stubbornly bullish at extreme levels

Investor Intelligence Bull Ratio Source: Short Side of Long

  • Recent Investor Intelligence survey levels came in at 55% bulls and 15% bears. While the bullish readings pulled back during the January correction and now returned back close to elevated levels once, bearish readings remained at extreme complacency all along. it is as if investors refuse to turn bearish at any sign of a sell off. The chart above shows that the II Bull Ratio is once again at dangerously high levels, where previous intermediate peaks have occurred. Caution is advised.
  • Recent NAAIM survey levels came in at 89% net long exposure, while this weeks intensity was at a whopping 177%, with even the most bearish of managers in the survey holding a net long position (a rare occurrence usually found near market tops). While this indicator experienced a sharp fall in bullish sentiment during the January correction, similar to II Bull Ratio, it has also recovered to elevated levels in only a handful of weeks. The two month moving average of net long exposure still sits above 80%, a similar level to the May 2011 stock market top.

Chart 2: We are now registering a 15th monthly equity inflow in the row!

Equity Fund Flows Source: Short Side of Long

  • Recent ICI fund flows reports showed that “equity funds had estimated inflows of $4.96 billion for the week, compared to estimated inflows of $5.83 billion in the previous week. Domestic equity funds had estimated inflows of $3.11 billion, while estimated inflows to world equity funds were $1.85 billion.”  On the other hand, the recent report from Bloomberg show that Emerging Markets continue to experience outflows, with Europe the main destination for the hot money:

Withdrawals from U.S.-based ETFs investing in emerging-market equities and bonds totaled $11.3 billion this year, already surpassing the redemption of $8.8 billion for the whole of 2013, according to data compiled by Bloomberg. Funds investing in European assets added $5 billion in the first two months of 2014, compared with $18 billion full-year inflows in 2013.

Returns in emerging-market stocks this year are trailing their European peers the most since 2011 as China’s economy slowed, currencies from Turkey to South Africa tumbled while violent protests in Ukraine fueled geopolitical tension. In Europe, economic confidence increased for a ninth month in January, suggesting the scars from the ravages of the sovereign-debt crisis in 2011 are healing.

  • Recent Rydex fund flows still continue to remain at extremely bullish levels. Rydex traders, usually considered as dumb money, are still pilling into US equities at levels not seen since the great Tech Bubble burst in late 1999/2000 period. Investors who are interesting in seeing the short term as well as the long term chart, should click here and here for the links. As you can see, there is no doubt about the fact that Rydex traders are completely swept away by the bullish market trend and in full speculation mode.

Chart 3: Hedge funds building long exposure towards extremes again

Nasdaq COT Source: Short Side of Long

  • Recent commitment of traders reports (also known as dumb money) showed that speculators have not been shaken out during the January correction and have once again started to build their stock exposure towards extremes. Hedge funds and other speculators currently hold over 113,000 net long contracts, which is a substantial increase from 63,800 we saw during middle of February. As can be seen in the chart above, when contracts increase above 110,000 net longs, usually a pullback or a correction follows. Investors should also note that the last time we saw hedge funds collectively hold a net short positions, was all the way back in November 2012. In other words, it has been a long time since futures traders have been bearish.

Chart 4: Volatility is putting in a rounding bottoming (caution advised)!

Volatility Index Source: Short Side of Long

  • Long term volatility conditions can be seen by looking at the chart above. Any investor should be able to make a observation that during the initial stages of the bull market, volatility was constantly high. We went through a 2010 flash crash and 2011 crash. While it was difficult to read it at the time, this was the wall of worry testing investors nerves. However since late 2012, volatility has completely died down and conditions have turned “calm”. This is usually what the last part of the bull market looks like; where greed, speculation and complacency take over the wall of worry.
Chart 5: According to NYSE, investor leverage climbed to a new record

NYSE Margin Debt Source: Short Side of Long

  • According to NYSE, Margin Debt (measure of investor leverage) climbed to yet another record high in January 2014. Official nominal margin debt readings now stands at $451.3 billion, climbing by over $6.3 billion in a month. Margin debt, adjusted for inflation (if we can actually trust those government figures) currently stands at a record high as well, exceeding both the 2000 and 2007 peaks. Margin debt relative to the current US GDP is near its record highs too, as can be seen from this chart. Finally, investor credit balance is also at record lows, confirming that excessive speculation with leverage is alive and well.
Chart 6: Smart money insiders are selling stocks to retail investors 

Insider Buy vs Sell Ratio Source: Short Side of Long

  • Corporate Insider activity (also known as smart money) shows that net selling has been increasing over the recent months. Corporate insiders have one of the most impeccable timing records out of all markets participants (that is why this group has earned the nickname “smart money”). As we can see in the chart above, over the last several years, Corporate Insiders have managed to time intermediate bottoms in March 2008, November 2008, March 2009, August 2010, August 2011 and June 2012. Not bad at all! At the same time, they have also been strong sellers during recent market peaks. The continuous selling by insiders is a warning signal of a possible market correction ahead. I know I sound like a broken record, but… once again caution is advised.

Bonds

  • Relative to the last report in early February, Bond sentiment surveys continued to rise higher towards the neutral level over the last several weeks. Market Vane Bullish Percentage increased above 55% bulls and towards a neutral level. Consensus Inc survey increased even further above its mean level, with readings now close to 55% bulls as well. Neither of these surveys are anywhere near extreme optimism. February report of the Merrill Lynch Fund Manager Survey showed that exposure towards bonds still remains quite negative, but has moved out of the “extreme” pessimism” zone.

Chart 7: Traders started adding some capital towards fixed income again

Bond Fund Flows Source: Short Side of Long

  • Recent ICI fund flows reports showed that “bond funds had estimated inflows of $2.33 billion, compared to estimated inflows of $2.91 billion during the previous week. Taxable bond funds saw estimated inflows of $1.66 billion, while municipal bond funds had estimated inflows of $667 million.” Bond funds are currently in the process of establishing a first monthly inflow, after eight consecutive monthly outflows. With the majority of selling and outflows occurring in May and June of last year (Bernanke’s hint of Fed Taper), investor panic once again marked an intermediate degree bottom for the corporate bond market. However, the rally has lagged equities without a new high confirmation and looks quite weak.

Chart 8: Speculators now hold mild net short bets on Treasury Bonds

Treasury COT Source: Short Side of Long

  • Recent commitment of traders report (also known as dumb money) shows that small speculators have stopped closing out their net short contracts. It seems that the short squeeze has either taken a breather or has completely stopped. The latest report released on Friday showed that net short bets remain just shy of -25,000 contracts. Comparing the current level to that of early December 2013, when contracts stood close to -69,000, demonstrates that almost 66% of the bearish bets have already been closed. Interestingly, so far the Long Bond has merely moved sideways, with a resistance at 135 holding any rally attempts.

Commodities

Chart 9: Hedge funds turn bullish on commodities as they chase the rally 

Commodity COT Source: Short Side of Long

  • In the early February sentiment report, I concluded that hedge fund exposure to commodities remained quite depressed. It is amazing what can happen in a month. The recent commitment of traders reports (also known as dumb money) showed that hedge funds and other speculators are now turning very bullish towards the overall commodity complex, with exposure reaching over 820,000 net long contracts (custom COT). Please note that positioning stood at 160,000 net long contracts in early January of this year. Majority of the net long contract building has come from Agricultural sector, where weather effects have pushed prices higher.

Chart 10: Industrial commodities aren’t confirming the breakout yet 

Industrial Commodities Source: Short Side of Long

  • Despite the technical commodity breakout, various industrial and economically sensitive components of the index are not confirming the rally (…just yet). Chart 9 shows that industrial metals, lead by Copper, have been in a decline for over 3 years and have not yet managed to break out of their respective downtrends. As I write this report, Copper has been in a short term free fall and now trades at its major support of $3.00 per pound. At the same time, over the last 3 years, Brent Crude Oil has been trading sideways with an average price of $110 per barrel. Despite a large build up in net short positions over 2013, both of these commodities  have failed to rally. To validate the recent raw material uptrend, both of these commodities definitely need to break out and join the party.

Currencies

Chart 11: Hedge funds continue to reduce exposure towards the USD!

Dollar COT Source: Short Side of Long

  • Recent commitment of traders reports (also known as dumb money) have shown a gradual decrease in bullish positioning towards the US Dollar. During the last report (early February), cumulative G10 positioning by hedge funds and other speculators stood at $20 billion worth of net long contracts. This figure has now been reduced by half, towards $10.3 billion net longs. Hedge funds remain mixed in the G10 currency complex as they continue to favour European continent currencies such as the Euro, the Pound and the Franc; while still disliking commodity related currencies such as the Aussie and the Loonie. Finally, Japanese Yen still holds the largest net short position (almost $10 billion), despite a recent mini-short-squeeze.

Chart 12: British Pound’s sentiment continues to remain very elevated

Pound Sentiment Source: Short Side of Long

  • Currency sentiment survey readings on the US Dollar remain neutral, giving a contrarian trader neither the bullish nor the bearish signal. However, various G10 currencies are experiencing opposite ends of the investor mood. Sentiment continues to be bearish on the commodity currency complex (confirming the COT report), while bulls are now running with the European currencies (some of which were incredibly hated only 6 months ago). The chart above shows a huge cluster of optimism towards the British Pound, as the currency finds itself at a major resistance zone. SentimenTrader summarises the current conditions well, stating:

…the Public Opinion data is showing that investors have been bullish on the pound for an extended period of time. We haven’t really seen any big jumps in bullishness; it’s just that it has been very high for a very long time.

… [6 month sentiment average] is nearing 70% for only the third time since 1991. The other two times, the pound wasn’t able to make much headway. This is curious given the pound’s relatively muted rally over the past six months compared to what we’d seen the other times.

Chart 13: PMs short squeeze on bearish hedge funds has been in play!

Precious Metal Short Selling Source: Short Side of Long

  • Recent commitment of traders reports (also known as dumb money) showed hedge funds and other speculators jumping into a Precious Metals rally, with majority of the short bets now being closed out (refer to chart above). Aggregate positioning in both Gold and Silver continues to increase from the early February report, with hedge funds now holding over 160,000 net long contracts. If we compare the current positioning to that of early December 2013, when total net long contracts stood at only 35,000, we have seen exposure rise by 4.5 times. Having said that, the important point to make here is that since early December, hedge funds have decreased their gross shorts by almost 50% (chart above); while gross longs have only been increased by around 15%. In other words, this is a short squeeze as there is very little buying going on as of now.

Chart 14: Miners are recovering, but have become short term overbought 

Gold Mienrs Short Term Performance Source: Short Side of Long

  • Precious metals sentiment survey readings have rebounded from the bearish we saw during the last couple of months in 2013. Gold and Silver sentiment is currently neutral right around the 50% mark, while Platinum has seen a full recover as investors turn more optimistic.  Overall, the Precious Metals sector has been through a recovery in the last quarter, with some assets doing better then others (miners have out-performed, Silver has under-performed). The chart above, together with this blog post, shows that Gold Miners have now become overbought from the short term perspective. Over the last two decades, there were 14 instances of similar overbought readings and interestingly 10 out of the 14 marked an automatic short term top and a pull back of at least 10% (sometimes much more). Therefore, caution is advised.