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Asbury Research Sentiment Survey 2010-11-11

Asbury Research Sentiment Survey 2010-11-11

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Published Monthly - Volume 7, Number 7 www.asburyresearch.com 1-224-569-4112
Sentiment Survey 
  A Logical Look at an Emotional Market
John J. Kosar, CMTNovember 11, 2010
 
Report Summary
 
The US Stock Market:
 
Near To Intermediate Term Bearish.
 The latest datasuggests that the US stock market is probably in the latter to final stages of its currentJuly advance, but still may be a few weeks away from completion. However, at least acorrective decline appears likely sometime this quarter, before the current July advancecontinues appreciably further.
 
US Treasury Prices: Near To Intermediate Term Bearish.
 Three different types offixed income investor, plus investors in the Japanese stock market, concur that longdated US Treasury prices are either within weeks of an important peak or have alreadypeaked at their recent highs.
 
The US Dollar: Near Term Bullish,Intermediate Term Bearish.
Four differentmeasures of investor sentiment, representing two different time frames, indicatefavorable investor sentiment for a near term rebound in the US currency now, withinwhat appears to be an unfinished decline that began in June
.
 
 
Crude Oil & Energy Prices:
 
Near Term Bearish, Intermediate Term Bullish.
 Bothasset flow- and survey-based data indicate favorable investor sentiment for a near termpeak to emerge in energy-related asset prices soon, probably over the next few weeks,within the larger and what appears to be unfinished advance that began in early 2009.
* For further information about Asbury Research please visit the 
or our 
.
 
 Asbury Research Page 2 11/11/2010
US Stock Market: Too-Bullish Investors Suggest At Least A Correction Is Likely In Q4
In today's report we display and discuss the latestinvestor sentiment data according to four differenttypes of investor: Registered Investment Advisors(RIAs), individuals, small options traders and marketletter writers. The composite take-away from thesedata is that
these investors are either at or near amulti-year extreme in bullishness on the USstock market that historically coincided with orled a one to several month market decline
.
Chart 1
displays the S&P 500 (SPX) in the upperpanel and a weekly survey of market positioningaccording to
The National Association of ActiveInvestment Managers, or NAAIM
, in the lowerpanel. NAAIM was formed in 1989 as a non-profitassociation of
registered investment advisors
whoprovide active money management services to theirclients
"in order to produce favorable risk-adjusted returns as an alternative to more passive, buy and hold strategies" 
.Originally called SAAFTI and comprised of a smallgroup of successful, passionate firms, NAAIM hasgrown to include roughly 200 member firmsnationwide, managing an estimated $14 billion. Theirweekly member survey, which appears in this reportfor the first time, was launched in July 2007.
Chart 1
The red vertical highlights between both panelsshow that these professional investors are currentlyat a multi-year
most bullish 
extreme on the US stockmarket that has either coincided with or led whathave been the most important peaks in the SPX inthe past four years.Accordingly, , as a contrary indicator, this metricsuggests that the July advance in the US stockmarket is in its latter to final stages before at least acorrective decline begins.
Chart 2
measures investor sentiment according to aweekly poll of
individual investors
via the
American Association of Individual Investors(AAII)
survey. The poll asks the AAII membershipwhere they think the market will be in six months,and group the responses into three categories:bullish, bearish or neutral. The
AAII Bull Ratio
,which appears in the lower panel, is the percentageof bullish responses divided by the sum of thepercentage of bullish
and 
bearish responses. Aweekly bar chart of the S&P 500 appears in theupper panel.
Chart 2
Very similar to
Chart 1
, the red vertical highlightsbetween both panels show that these investors are just starting to move away from previous
most bullish 
extremes reached in October, extremeswhich have previous coincided with or led mostevery important peak in the SPX since 2006. Again,the message is that investors are historically toobullish on US equities for them to move much higherwithout at least a correction first.
Chart 3
(next page) measures investor sentimentaccording to
small retail options traders
via the
 
 Asbury Research Page 3 11/11/2010
OCC Small Trader Buy-To-Open Put/Call Ratio
 which appears in the lower panel. As the nameimplies, this data series only includes openingpositions on small option orders of just 10 contractsor less. A bar chart of the S&P 500 appears in theupper panel.
Chart 3
The green and red highlights in the lower paneldefine
most 
and
least bearish 
extremes by thesesmall investors, according to
the ratio of daily put volume versus call volume 
, since 2006. The redvertical highlights between both panels show thatthese investors are currently just starting to moveinto a multi-year
least bearish 
(meaning
most bullish 
)extreme that had previously either coincided with orled what have arguably been the most importantpeaks in the S&P 500 during this period.WE view this as more evidence,
from a completely different type of investor 
, that suggests the Julyadvance in the US stock market is probably in itslatter to final stages without at least a correctivedecline first.
Chart 4
measures investor sentiment according to
stock market newsletter writers
via the
InvestorsIntelligence
(bulls minus bears, blue line, lowerpanel) data. These investors are notorious trendfollowers just like the investors represented by
Charts 1, 2 and 3
, which means that they are alsotypically the most bullish at market tops and themost bearish at market bottoms. However, unlikeour previous charts, the blue arrow in the lowerpanel points out that these investors are currentlyonly about two-thirds of the way to reaching previous
most bullish 
extremes that have historicallycoincided with market tops, as highlighted by thethick red vertical lines across both panels.Accordingly, unlike the other charts,
these data suggest that there is still some room for more near term stock market strength 
before we can expect apeak to emerge.
Conclusion and Investment ImplicationsCharts 1-3
show that RIAs, retail investors andsmall options traders have all reached previousextremes in bullishness that, as a contrary indicator,have coincided with most of the important peaks inthe S&P 500 within the past five years.
Chart 4
,however, shows that market letter writers,
who tend to operate within a longer term time frame 
, have notyet reached similar extremes.
Combined, these data suggest that the US stockmarket is probably in the latter to final stages ofits current July advance, but still may haveanother couple weeks or so to go.
We would viewa move into most bullish territory in the InvestorIntelligence data shown in
Chart 4
as an indicationthat a corrective decline in US equity prices is readyto begin.

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