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Equities / Sentiment
January 11th , 2013
Clue6
January 2013
1
Chart 2
II Bull Ratio
110% 100% 90%
S&P 500
140%
1600
120%
1400
1200 100%
80%
1000
70% 800 60% 600 50%
60% 80%
1000
800
600
40%
30% 20%
400 200 0
20% 40%
400
200
The Investor Intelligence surveys (Chart 1) Bull Ratio is rebounding rapidly toward the 70% level. The American Association of Individual Investors (Chart 2) surveys has been very volatile in the past 4 years. The Bull Ratio is now too high for our comfort.
Clue6
January 2013
2
Chart 4
NAAIM Survey
1800
NAAIM Survey
100
Standard Deviation
S&P 500
1600
90
70
80
1400
50
1200 30
60 1200
10
40 1000
-10
20
800
-30
600
-50
600
The National Association of Active Investment Managers allocation survey is above 85% (It means that managers are recommending, on average, an 85% net long exposure) with a relatively low diffusion of answers (Chart 3). It indicates conviction. On Chart 4 one can see that the average exposure of the surveyed lowest quintile is almost 70%. It indicates that there is no fear.
Clue6
January 2013
3
Chart 6
TSP Survey
Tsp Survey
NAAIM Survey S&P 500
3.5
S&P 500
100
3.0
80 1200
2.5
1200
2.0
60
1.5
40
1.0
20
0.5
600
0.0
600
On Chart 5 one can see the average exposure of the surveyed highest quintile is high. The TSP Bull/Bear Survey (Chart 6) is not indicating too much bullishess. Note that the Hulbert Newletter Surveys (Nasdaq and Dow) are indicating excess optimism too.
Clue6
January 2013
4
Chart 8
80
60
75
70 50 65 40 60 30
55 20 50
10
45
40
The crash confidence index (Chart 7) measures the percent of the population who attach little probability to a stock market crash in the next-six months. We are far off the excess of 2004-2007 but have rebounded from the 2009 and 2011 lows. The analysis of this index is tricky Low levels occurring after prolonged decline are bullish, but you want the index to rise strongly along the markets (remember the crowd is wrong at the end of the trend not during a trend). The buy-on-dips index (the percent of the population expecting a rebound the next day should the market ever drop 3% in one day) (Chart 8) is reaching 2006-7 lows.
Clue6
January 2013
5
ML Fund Managers Survey Hedge Fund Positioning
The ML Fund Managers Survey Risk & Liquidity Composite is the combination of the risk appetite, investor time-horizon and cash weightings level (Chart 9). It is reaching disturbingly high levels. Cash balance has fallen to 4.1%. There are a net 40% of respondents who are overweight equity (> net 50% underweight at the 2009 lows). Hedge Funds are not yet using as much leverage as they did in 2006-2007 but the ratio has increased substantially since the 2009 lows. Their net long position is surpassing its 2007 highs(Chart 10).
Clue6
January 2013
6
ML Fund Managers Survey Percentage Net Overweight Europe
Clue6
January 2013
7
ML Fund Managers Survey Percentage Net Overweight Emerging markets
Japanese stocks are very underweighted again (Chart 13). Even if analysts are starting to talk about it, we believe overweignt Japanese equities (hedged) will be one of the best trade in the next few years. Emerging Markets relative exposure is high (Chart 14). Could we see an accident in this space in 2013?
Clue6
January 2013
8
S&P 500 and OEX Open Interest PC Ratio
OEX Open Interest Put Call Ratio MA S&P 500
Chart 16
2.5
S&P 500
1600
2
1400 5 1200
1200
1.5
1000
800
1
600 2 400
0.5
1 200
600
Source: Clue6
Source: Clue6
The OEX put call ratio (Chart 15) has risen to above 2 plenty of times in the past 6 months. This is a warning of a nearing top which has rarely failed, if ever in the past.
The open interest OEX put call ratio (Chart 16) remains high.
Clue6
January 2013
9
SX5Eand SX5E Open Interest CP Ratio
SX5E Open Interest Put to Call Ratio
Chart 18
SX5E
6000
6000 2.2
1.4
1.3
1.7
1.2
1.1
3000
3000
1.2
0.9
0.7
0.8
0.7
0.2
1500
0.6
1500
Source: Clue6
Source: Clue6
The Eurostoxx 50 put call ratio (Chart 17) has risen sharply in the past few months. The open interest put call ratio (Chart 18) is reaching worryingly high levels
Clue6
January 2013
10
NIKKEI and NIKKEI Open Interest CP Ratio
Nikkei Open Interest Put to Call Ratio Nikkei
Chart 20
2.2
Nikkei
2
1.9
1.8
1.7
12000 1.5
1.6
12000
1.3
1.4
1.1
1.2
0.9
0.7
0.8
0.5
6000
0.6
6000
Source: Clue6
Source: Clue6
The Nikkei put call ratio (Chart 19) is at a very low level which is a bullish sign. The open interest call put ratio (Chart 20) has risen slightly but remains extremely low which is a positive.
Clue6
January 2013
11
S&P 500 and Small Traders Buy to Open Put/Call Ratio
1,700
Chart 22
1,650
1.20
1,500
1,400 1,300 1,200 1,100 1,000 900 0.20
1,050
0.40
850
800
650
0.00
700
Small traders (up to 10 contracts traded) activity is now more concentrated into bullish bets (54%) (Chart 21). The buy to open put call ratio is below 0.6 (Chart 22).
Clue6
January 2013
12
S&P 500 and Small Traders Option Activity
1,650
Chart 24
1,650
1,450
1,250
1,050
10%
650
15%
650
Buy to open put activity is at 16% (Chart 23). Not urgency to protect the downside seems to be the norm. Sell to open call activity is high (Chart 24).
Clue6
January 2013
13
S&P 500 and Small Traders Option Activity
1,650
Chart 26
1,650
24%
1,450
1,250
1,050 30%
1,050
20%
650
10%
650
Buy to open call activity is relatively low at less than 30% (Chart 25). Sell to open put activity is high at 24% (Chart 26) and it would not if people were worried about a potential waterfall decline.
Clue6
January 2013
14
EuroStoxx 50 and 3M 90/110 Skew and VDAX
5100
Chart 28
VDAX -10
EuroStoxx 50
4600
19 1500
17 1300 15 1100 13 900 11
4100 12 3600
3100 10 2600
700
2100 8 1600
500
6 1100
300
600
100
100
Source: Clue6
Source: Clue6
The option skew is the shape of an asset option implied volatility along the strike for a given maturity. In the above charts we are looking at the absolute difference of the implied volatility of 3 months put options with a strike at 90% of the current price and 3 months call options with a strike at 110% of the current price. The higher the level the more expensive puts are relative to calls i.e. the more nervous investors are. The S&P 500 skews has declined in the past few months (Chart 27). It remains highs compared to the Vix which is a negative divergence for the markets. The same is true for Europe (Chart 28).
Clue6
January 2013
15
Chart 30
1,200 6
1,000 800 4 2
600
100 80
60 40 20 Russell 3000 Insiders Buy (lhs) Russell 3000 Insiders Sell
0
100 90 80 70 60 50 40 30 20 10 0
Source: InkResearch
The Russell 3000 sell/buy ratio has been very high in December (Chart 29). Insiders fearing a rise in capital gain taxes have probably contributed to the selling. In Canada, the buy/sell ratio has been increasing since its October lows (Chart 30).
Remember, insiders activity is especially useful in 2 configurations: lots of relative buying or increased selling when the markets decline
Clue6 January 2013
16
Source: DB
Source: DB
Europe buying pressure is low (Chart 31-32). Note that insiders were wrong during the whole bear market in 2007-2009. Local spikes have predictive powers and we seems to have one at the moment.
Clue6
January 2013
17
S&P 500 and Leuthold Core Beta Exposure
1800
Chart 34
2
S&P 500
S&P 500
1400 0.65
1.5
1400
1200
1200 1
1000 0.15
1000
800
800 0.5
600
600
-0.35
400
400
200
200
-0.85
-0.5
Source: Clue6
Source: Clue6
J. Hussman is, according to our calculation, currently fully hedged (Chart 33). He continues to have a substantial exposure to high quality, cash generating, large caps stocks. S. Leuthold, who has been lowering its exposure substantially in the past few months (Chart 34).
Clue6
January 2013
18
MSCI EM and Dow Jones Credit Suisse Blue Chip Emerging Markets Hedge Fund Index Beta Exposure
500
MSCI World and Dow Jones Credit Suisse Blue Chip Global Macro Hedge Fund Index Beta Exposure
1800
Chart 36
0.8
MSCI EM (usd)
1600 0.6
0.6 400
0.4
300
0.2
1200 0 200 -0.2 1000 0 150 -0.4 100 800 -0.6 -0.2 50 0.2 250
-0.8
600
-0.4
Global macro hedge funds exposure to equity markets (the correlation is such between assets that we should say exposure to the reflation trade) is one of the highest in the past 8 years(Chart 35). Once the exposure move to an extreme and form a divergence with the markets, a counter-trend move or trend change is not far away. Note that we have a divergence. The same is true for emerging markets hedge funds (Chart 36).
Clue6
January 2013
19
S&P 500 and Non Reportable Net Long Equity Futures (in usd bio.)
S&P 500
Chart 38
150,000
150000
110,000 2800 90,000 70,000 1300
100000
50000
50,000
30,000
-50000
(30,000)
-100000
700
(50,000)
650
Non-Commercial have a small net long position in Nasdaq futures (Chart37). Non-reportable have a small net long position in US equity futures (Chart 38).
Clue6
January 2013
20
Rydex Leveraged Bull to Bear Assets
Chart 40
1400
1000
600
Source: G. Lerner
Proshare short ETF total shares outstanding have been declining rapidly in the past few weeks (Chart 39). It indicates bears being squeezed out or throwing the towel precisely at the wrong moment. Rydex leveraged (and unleveraged) assets are indicating a high level of optimism (Chart 40).
Clue6
January 2013
21
Chart 42
20,000.0
VIX Time-Spread
1.25
S&P 500
0.0
VIX
1.20
64.00
-20,000.0
-80,000.0 16.00
-100,000.0
-120,000.0
8.00
The VIX time-spread has risen sharply in the past 3 weeks and is now approaching levels where markets top during bear markets (Chart 41). Non-commercials have built a huge net short position VIX future (Chart 42). It could contribute to a huge short squeeze with ricochet effect on stocks and vice versa (the very high level of margin debt and negative free credit at brokers would not help).
Clue6
January 2013
Equities: Sentiment
Sentiment Composite
1.8
22
S&P 500
1600
-0.2 1000
-1.2 800
Source: Clue6
-2.2
600
The sentiment Composite is reaching high level in the context of a mature (dying) cyclical bull market.
Clue6
January 2013