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Sentiment Levels May Pose Headwind For Markets

  • Written by Syndicated Publisher No Comments Comments
    November 14, 2013

    Markets are up over 8% since the October lows and as the market has vaulted higher so too have investor sentiment levels, which will have to be worked off at some point. As seen below, institutional active managers are the most bullish they have been since early 2013 (middle panel below) with retail investors the most bullish they have been since early 2012 (bottom panel).

    Source: Bloomberg

    Other indicators are also showing excess bullishness/complacency with current levels often associated with short-term market tops. As seen below, the put/call ratio rests near the lows seen over the last two years (middle panel) and the recent decline in the VIX is also at the extreme levels seen over the last two years (bottom panel), both of which suggest the markets need to let some of the bullish air out of the bag.

    Source: Bloomberg

    Even if a pullback occurs the market backdrop remains healthy and robust with no signs of a major impending top on the horizon. For example, new highs on the S&P 1500 Index (all market caps combined) shows new highs continue to hit in the 20-30% range on rallies while declines don’t even see new 52-week lows hitting the 5%+ mark. This indicates that the strength of the bulls (buyers) outweighs the strength of the bears (sellers), and economics 101 teaches us that when there are more buyers than sellers prices rise, and that is what we have with a rising stock market.

    Source: Bloomberg

    Not only is the stock market incredibly healthy but so too are general financial conditions. Both the Bloomberg US and European Financial Conditions Index rests near the highs and are confirming the markets recent move higher.

    Source: Bloomberg

    Until we begin to see market breadth deteriorate and financial conditions erode, any pullback in the market is likely a healthy event to remove an overly bullish and overbought market, rather than the precursor to a bear market.

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    About The Author – Chris Puplava, Financial Sense Online

    Chris graduated magna cum laude with a B.S. in Biochemistry from California Polytechnic State University, San Luis Obispo. He joined PFS Group in 2005 and is currently pursuing the designation of Chartered Financial Analyst. His professional designations include FINRA Series 7 and Series 66 Uniform Combined State Law Exam. He manages PFS Group’s Precious Metals Managed Account, Energy Managed Account, and Aggressive Growth Managed Account. Chris also contributes articles and Market Observations to Financial Sense and co-authors In the Know—a weekly communication for Jim Puplava’s clients only—with other members of the trading staff. Chris enjoys the outdoors.