2 Prime Indicators of Investor Optimism

2 Prime Indicators of Investor Optimism

Not long ago, I wrote about how the Investors Intelligence (II) sentiment survey was showing significant and persistent optimism. That’s not surprising given the S&P 500 Index (SPX) keeps hitting all-time highs. This week, however, I’m contrasting that sentiment survey with a different one put out by the American Association of Individual Investors (AAII). In this survey, optimism has collapsed. The chart below shows the difference in the percentage of bulls and percentage of bears from each survey. The AAII poll shows an equal number of bulls and bears, while the II poll shows a lot more bulls. First, I talk about the different methodologies in the survey, and then I quantify S&P 500 returns after we see these polls and the stock market behaving as they are now.

polling methods

Polling Methods

You can see in the chart above that those polled in the AAII survey are a lot fickler than those in the II poll. That’s due to the methodology. The II poll is a collection of over 100 published investing newsletters in which the editors at II determine the percentage of bulls and bears. There’s also a third designation for those that are long-term bullish and short-term bearish. The AAII poll is very different. It’s an online poll of individual investors who simply vote which way they think the market goes over the next six months. It’s easy to understand why anonymous people voting online would be more likely to switch their stance than a published weekly newsletter.

Individual Investors Get Squeamish

We have data on both polls going back to 1987. I looked at past instances when the II poll showed at least 35% more bulls than bears, while the AAII poll had at least as many bears as bulls. The table below summarizes how the SPX performed after these occurrences. The second table shows typical returns since 1999, the year of the first occurrence.

When we compare the two tables, there isn’t a whole lot of difference to be seen. In the very short term (one month), there’s a bit of underperformance after a signal when you look at the average return. The likelihood of a positive return, however, was a little better. Within six and 12 months after a signal, stocks have done slightly better after these poll divergences. Overall, though, stocks tend to perform close to normal.

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spx returns

The fall in optimism seen in the AAII poll is especially interesting now as the SPX hits all-time highs. I looked at those returns above, and I filtered out only the signals that occurred with the index at all-time highs. This has happened 11 other times. The table below summarizes those returns. The AAII investors were right to be bearish in the short-term. A month after these signals occurred with the index at an all-time high, the SPX averaged a loss of 1.72% over the next month, with less than half of the returns positive. Longer term, however, tended to perform better than normal.

spx returns 2

Finally, the chart below shows the SPX since 1999. The dots are the signals of when the index was at an all-time high then the AAII poll showed pessimism, differing from the II poll. The first two occurrences happened relatively close to major market tops. These signals also occurred in September of 2018 and February of 2020 right before markets sold off sharply (double-digit percent losses in the next three months). While the longer-term returns have been fine after these instances, the recent pessimism in the AAII poll might be something to be concerned about in the short term.

Why the entire market is about to take off like a meme stock

Ryan Payne, President of Payne Capital Management, Host of the Payne Points of Wealth Podcast, joins Yahoo Finance to discuss the market impact from the latest retail sales data, investor sentiment, and outlook on market sectors to watch.

Video Transcript

• Let’s get a little bit more detail on what’s happening in the markets with Ryan Payne. He’s the president of Payne Capital Management, also the host of the Payne Points of Wealth podcast. Ryan, thanks for hopping on Yahoo Finance this afternoon. Obviously, just want to start off with the big market action. We’re seeing the Dow sell off. It actually seems like it’s eased up a little bit, but it was down over 400 points as of not long ago in the afternoon.

Is this an overreaction to that retail sales report, which really appeared to be the trigger, showing that 1.1% decline in retail sales between June and July?

RYAN PAYNE: Yeah, I think it is. I think, you know, you’re seeing a little bit of price shock from the part of the consumer, just because, you know, we know we’ve seen extreme inflationary pressure here. But, you know, what blows my mind, Brian, is like this market just can’t sell off, right? We get a little bit of selling. But we haven’t seen a 10-15% correction in I don’t know how long.

And, you know, you’re seeing a lot of economists and strategists on Wall Street now looking for some sort of catalyst here to get a sell-off, because we are going into what you would call the weaker part of the year for the market historically. But, man oh man, I mean, if you look at the overall economic data, you look at profits this quarter, it’s kind of hard not to be bullish here, from where I’m standing, Brian.

• Yeah, Ryan, I liked the title of your note talking about the entire market’s about to take off like a meme stock. But you also do raise a couple of points here. And you bring up the questions that investors have to ask themselves, one being, what is the next big catalyst that will move the market into. Will that catalyst move the market higher or lower? How are you thinking about those scenarios or probabilities? What are the kind of, how do you think about– I know you can’t really answer the question per se, but what are the scenarios you’re thinking about it as it relates to those questions?

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RYAN PAYNE: Yeah, so what I look at right now is just like where are the odds in favor of going up or down here. And some of the things I look at are like, number one, sentiment, and sentiment tends to be counter, right? So when you have extreme bullishness, that’s not a good sign for the market. You get extreme bearishness, that’s actually bullish. And if you look at investors right now, even with all this strength this summer, Julie, you know, investors are relatively bearish.

If you look at that AAII sentiment indicator that comes out on a weekly basis, it’s for the fifth week in a row, it’s below the historical average for bullishness. So I think investors right now, you know, they are a little bit tepid when it comes to the market. And meanwhile, you’ve got over $4 trillion sitting in cash right now, money market funds.

There’s a lot of investors that have not been in this market, were earning nothing on cash. And we know that, if you look at profits going into the end of this year, and even into next year, still look extremely strong. I have to think here, if anything, we’re going to see some sort of melt up in the market, not melt down. And again, using my analogy of the meme stock, you know, I think that is going to– you’re going to see that across the entire market, as more money has to get into the stock market, because so many investors right now are still sitting in cash, which is just remarkable.

• Wow, maybe the real meme stock was just the whole market to begin with. Now I just want to ask you now about possible re-rotation within sectors. Now what’s been interesting is that we were talking so much about the reflationary trade in the spring of this year, and then people started to diverge on whether or not it was a peak growth or not peak growth environment. But what you did observe was the outperformance of the technology sector from mid-May until early August. Is that a story that you expect to extend through the rest of the 2021, or are there other places where you’re watching very closely?

RYAN PAYNE: I think more money will get drawn into that trade, because, I mean, you have investors blindly buying the S&P 500 here, buying bond funds, which I would call more long duration assets, because let’s face it, the S&P 500 now is 5 stocks, right? The capitalization of the big five tech companies is essentially where money is flowing to. And I think that trend can continue, going back to my meme thesis, but as a longer term trend.

I think you do want to reallocate here, because the reality of it is, I don’t care what the Fed tells you, you know, inflation doesn’t look that transitory here. And we saw that earlier in the year, when we had the 10 year go up over 1.7%. Now it’s come down a lot, it’s still up a lot from where it was a year ago. But I think, you know, as you start to see more pressure on interest rates, and we start to realize that inflationary pressure is probably not as temporary as the Fed would like you to think, you know, that’s not very good for long duration assets.

You know, you guys were talking about the ARK fund on the show today. And you have Michael Burry shorting the ARK fund. That trades at 109 times forward earnings. That’s insanity. And we know that those longer term earnings stories are growth stories, become less valuable as interest rates go up and inflation kicks in, in more cyclical sectors like financials, energy, which have actually done better this year. If you look at the overall year they’ve outperformed technology.

I still think that’s the place to be longer term, because, you know, as we get into the end of the year, and these unemployment benefits come off, you’re going to have a lot of people coming to the labor markets, and we know there’s more jobs than people to fill them, which means that companies will have to continue to raise wages, which means they’re going to continue to raise prices on you and me. That’s extremely inflationary here.

• Yeah, we’ll see. Well, obviously the Federal Reserve in view as they head into that Jackson Hole meeting next week. But Ryan Payne, president of Payne Capital Management, thanks for breaking all that down here on Yahoo Finance this afternoon.

RYAN PAYNE: Thank you.

SENTIMENT/Privatanleger setzen vermehrt auf fallende Kurse

FRANKFURT (Dow Jones)–Die Privatanleger in den USA wie auch in Deutschland werden bearisch. Während die Umsätze an den Börsen ausdünnen und in den vergangenen Tagen die Indizes zu neuen Rekorden ansetzten, setzen die Privatanleger zunehmend auf fallende Kurse. Wie der wöchentlichen Sentiment-Umfrage der Deutschen Börse zu entnehmen ist, fiel der “Bullenanteil” der Privatanleger um zwei Prozentpunkte auf 33 Prozent. Das Lager der Bären stieg dagegen um 5 Prozentpunkte auf 42 Prozent, während das neutrale Lager um 3 Prozentpunkte auf nun 25 Prozent abnahm.

Für Sentiment-Analyst Joachim Goldberg ist die Stimmung aktuell schlechter als die Lage im DAX. Im Falle eines stärkeren Rücksetzer scheine der Index bei 15.400/15.450 Punkten durch mögliche Rückkäufe der Bären ordentlich abgesichert zu sein. Auf der anderen Seite handele der DAX nur knapp unter dem Allzeithoch. Sollte dieses Überschritten werden, dürften die Bären langsam mit Käufen an den Markt kommen, um die Short-Positionen zu schließen.

Wie in Deutschland sind auch in den USA die Privatanleger bearischer geworden. Laut der wöchentlichen AAII Sentiment Survey fiel das Bullenlager auf 33,2 Prozent von 37 Prozent in der Vorwoche. Im Lager der Pessimisten befinden sich nun 35,1 (31,5) Prozent. Von der Seitenlinie schauen 31,7 Prozent dem Geschehen an der Wall Street zu nach 31,5 Prozent in der Vorwoche.

Kontakt zum Autor: thomas.leppert@wsj.com

DJG/thl/ros

(END) Dow Jones Newswires

August 19, 2021 04:16 ET (08:16 GMT)