By William L. Watts, MarketWatch
NEW YORK (MarketWatch) -- Bulls have turned tail and are on the
run, according to investment-sentiment surveys, leaving traders to
gauge whether the usually contrarian indicator means stocks could
be poised to test all-time highs set earlier this month.
The latest weekly survey from the American Association of
Individual Investors, probably the most closely watched gauge of
investor sentiment, found 42.9% of respondents were bearish on the
outlook for stocks, versus 29% bullish and 28.2% neutral.
That marked a more than 14 percentage point rise in bearishness
from the previous week, marking the highest level of pessimism
since mid-April. Bull sentiment minus bear sentiment, as
illustrated in the above chart, has now fallen to negative 14%.
Yet another way to slice the sentiment data, the bull ratio,
dropped to less than 40% from more than 73% less than two months
earlier, said Jason Goepfert of Sentimenttrader.com. The bull ratio
is bullish sentiment versus total bullish and bearish
sentiment.
Such a rapid deterioration in sentiment from such a high level
has occurred 11 other times in the last 26 years, Goepfert said.
Nine out of those eleven times, the S&P 500 index was positive
a month later, averaging a gain of 1.7%, he said. The outcome less
than a month or more than three months later was much more mixed,
Goepfert noted, adding that while sentiment has fallen sharply,
it's not yet at a level showing "extreme pessimism."
That would require a bull ratio of less than 35%, with a reading
closer to 25% usually required to signal that investors are
entering the "throwing-in-the-towel" phase.
(Read more on contrarian indicators: B: of: A:'s sell-side
signal:
http://blogs.marketwatch.com/thetell/2013/08/01/stocks-still-have-room-to-run-says-b-of-a-contrarian-indicator/.)
U.S. stocks ended higher on Friday, allowing the S&P 500
(SPX) and the Nasdaq Composite (RIXF) to snap two-week losing
streaks. The S&P rose 0.5% last week, while the Nasdaq jumped
1.5%, aided as Microsoft Corp. (MSFT) led a Friday surge in the
wake of Chief Executive Steve Ballmer's plan to retire within the
12 months.
The S&P 500 remains 2.7% off its all-time closing high of
1,709.67 set on Aug. 2.
The Dow Jones Industrial Average (DJI), however, logged a third
consecutive week of declines despite Friday's higher finish,
marking its longest weekly losing streak since Nov. 16, 2012.
Fund flows show investors are taking their money out of the
market. U.S. equity mutual and exchange-traded funds lost a net
$12.3 billion in the week ended Wednesday, the worst week since
2008, according to a Bank of America analysis of EPFR Global
data.
John Goltermann, senior vice president at Obermeyer Asset
Management in Aspen, Colo., argues that the overall evidence,
including fund-flow data, indicate retail investors remain a
"pretty reliable contrarian indicator."
The fact that sentiment has started to sink as stocks come off
their all-time highs likely reflects retail investors reacting to
market cues rather than fundamentals, he said. That's been
illustrated by heavy retail outflows from emerging-market equity
and fixed-income assets, he said, a move he contends isn't
consistent with fundamentals.
But J.J. Kinahan, chief derivatives strategist at TD Ameritrade
in Chicago, says the data indicates retail investors are becoming
more savvy. The AAII data, which is largely consistent with the
brokerage firm's own survey data, shows traders prudently taking
some money off the table as equities trade near highs.
"I think people are more aware of what's going on around them in
the economy" and recognize that while the situation may be
improving, the recovery is still sluggish, he said.
Meanwhile, retail and institutional investors alike are still
grappling with uncertainty surrounding the ramifications of the
Federal Reserve's expected decision in coming weeks or months to
begin slowing the flow of monetary stimulus into the economy.
Get your monetary-policy fix: Live updates from Jackson Hole,
Wyo.
That uncertainty -- and the Fed's insistence that the decision
will be dictated by economic data -- ensures investors will keep a
close eye on any clues in the coming week.
The , however, remains light. Durable goods orders on Monday are
the highlight. They're expected to be weighed down by the aircraft
component, but the underlying report may look "decent," said
economists at RBC Capital Markets.
Weekly jobless claims are due on Thursday.
In Europe, Germany's Ifo index, a closely watched gauge of
business sentiment in Europe's largest economy, is expected to
marginally add to recent gains.
If the Ifo reading keeps pace with the recent rise in the German
purchasing managers' index, it would "lift expectations not only of
a gaining German recovery but of a building recovery across the
euro zone," wrote strategists at Investec in London.
European stocks over recent weeks have started to narrow the
year-to-date gap in performance with Wall Street. The Stoxx 600
Europe Index is up nearly 9% year-to-date versus the 16.6% gain by
the S&P 500. There is still significant skepticism, however,
over whether the euro zone's long-delayed return to growth marks an
economic renaissance rather than stabilization at weak levels. See:
Beware a false dawn for Europe stocks.
On the corporate front, retailers will remain in focus for a
second week. Earnings from Tiffany & Co. (TIF) on Tuesday
morning will offer clues to the luxury market, while
clothing-retailer Guess Inc. (GES) is due Wednesday and discount
retailer Big Lots Inc. (BIG) reports Friday.
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