EquitiesChart 1: Managers exposure towards equities is now “all-in” mentality!
Source: Short Side of Long- This months Merrill Lynch Fund Manager Survey equity exposure came in at 61% overweight, relative to last months reading of 48%. Managers have pushed their exposure towards global equities to second highest levels in surveys history. Last time we saw exposure this extreme was in February 2011, just as the Euro Crisis was starting. As we approach the time of the year usually considered seasonally weak and the Federal Reserve finishes up the taper, equities look rather vulnerable. If you believe in surveys contrarian signals, today is probably not the best time to be buying equities… to say the least!
Chart 2: Bullish sentiment isn’t euphoric, but complacency dominates
Source: Short Side of Long- Summarising various the equity sentiment survey readings for the month, we can observe in the chart above that bullish sentiment has pulled back from last months readings. In general, bullish sentiment hasn’t been all that extreme on either end, but the major story in the recent months has been the lack of volatility and total complacency, which has therefore lead to complete lack of bears. Other sentiment surveys such as Consensus Inc, Market Vane and NAAIM actually show a much higher level of bullishness that usually link to a possibility of a price pullback.
Chart 3: July is shaping up to be 1st major monthly outflow in two years
Source: Short Side of Long- This month’s fund flows report by ICI showed global equity funds showed a first estimated monthly outflows of -$9.4 billion, after so many consecutive monthly inflows. The chart above contains red dots, which show time periods in the last seven year history where retail investors pulled money out of mutual funds for the first time, after several monthly consecutive inflows. First occasion was in early 2007, just as the market was near its peak. Second occasion was into late 2009, just after a powerful rebound. Markets stalled over the coming months. Third occasion was into middle of 2011 just as the market was near its peak. And finally, here we are today…
Chart 4: Skew Index has remained above 135 for the last several weeks!
Source: Stock Charts (edited by Short Side of Long)- Summarising this month’s options & volatility conditions continue to remain in a very complacent zone. Obviously, this isn’t a major worry for the time being, until volatility starts picking up and investors start getting worried. A market trader with a keen eye should have already noticed a pick up in the VIX, as it diverges with large cap indices such as S&P 500. Furthermore, while not perfect, another indicator is also flashing warning signals. Skew Index, seen in the chart above, is used to predict a possible pick up in volatility. The 10 day moving average of the indicator has remained above 135 for several weeks now, which according to CBOE indicates almost 12% chance of a 2 standard deviation move.
HT: Abnormal Returns
