Archive for Market Indicators

Fading Magazine Covers….

Just passing along an observation here from John Hussman’s latest weekly letter.  He cites the extreme bullishness of the Barrons Big Money Poll which set an all-time high (via John Hussman):

“The stock market isn’t the only thing that has set records this spring. Barron’s semiannual Big Money poll of professional investors also is setting a record — for bullishness, that is. In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks — an all-time high for Big Money, going back more than 20 years.”

“Dow 16000!” – Barron’s Magazine Big Money Poll 4/20/2013

A few reminders…

“Still Bullish! (Dow 13000)” – Barron’s Magazine Big Money Poll, May 1, 2000

The May 2000 Big Money Poll was published with the Dow Jones Industrial Average at 10733.91. The Dow hadalready peaked nearly a thousand points higher in January of 2000, and would go on to lose about 40% of its value in the 2000-2002 bear market, with the S&P 500 and Nasdaq faring far worse.

“Dow 14000?” – Barron’s Magazine Big Money Poll, May 2, 2007

The May 2007 Big Money Poll was published with the Dow at 13264.62. The Dow did advance another 6% to reach 14000 by October 2007. By November (the poll is semi-annual), bulls were outnumbering bears by 2-to-1, and the headline ran “The Party’s Not Over.”  In fact, the market had already peaked, and proceeded to lose over half its value in the 2007-2009 bear market.

The Barron’s Big Money Poll is typically bullish, on balance. This is Wall Street, after all. But variations in the tone and extent of that bullishness can be informative, especially when the consensus is extremely optimistic at new highs of mature bull markets, and defensive at new lows of mature bear markets. I can’t really throw stones about 2009, as I had my own concerns at the time (relating to the need to stress-test against Depression era outcomes, despite our favorable views of valuation). But it’s worth noting that the 2009 Big Money Poll questioned the advance from the March lows, noting “good reason not to jump in with both feet yet.” The 2003 Big Money Poll – already well into a new bull market – was bullish on balance, and up from just 43% bulls in an October 2002 poll near the market lows. Still, the 2003 poll noted “the bulls’ views have been tempered by the market’s losses in recent years. Consequently their expectations for the Dow, the Standard & Poor’s 500 stock index, and the Nasdaq Composite have been ratcheted down from past surveys.”

This certainly isn’t a criticism of Barron’s itself. I grew up on Barron’s Magazine, and will remain a devoted reader at least as long as Alan Abelson provides a worthy counterbalance to the more short-sighted views of Wall Street and the Market Lab section remains in print. Still, the Big Money Poll is most useful as a contrary indicator.

Rule o’ Thumb: When the cover of a major financial magazine features a cartoon of a bull leaping through the air on a pogo stick, it’s probably about time to cash in the chips.”

huss

Bullish Sentiment Declines

By Charles Rotblut, CFA, AAII

Neutral sentiment is at highest level since December 22, 2011 in the latest AAII Sentiment Survey. The rise in neutral sentiment is occurring as both short-term optimism and pessimism are falling among individual investors.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 2.9 percentage points to 35.5%. This is the third consecutive weekly decline. It also puts optimism at its lowest level in a month. The historical average is 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 3.4 percentage points to 36.3%. As noted above, this is the highest neutral sentiment has been in more than 16 months. It is also the first time neutral sentiment has been above its historical average of 30.5% on consecutive weeks since October 4 and October 11, 2012.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 0.5 percentage points to 28.2%. This is a nine-week low for pessimism. The historical average is 30.5%.

The last time both bullish and bearish sentiment were below their respective historical averages on consecutive weeks was August 2 through August 16, 2012. The second-most-recent occurrence was on February 25 and March 4, 2010.

The declines in optimism and pessimism are not significant as both bullish and bearish sentiment remain close to their historical averages. While the major indexes continue to trade near record or multi-year highs, AAII members are mixed about what the next six months will bring in terms of market direction. Some members are encouraged by this year’s gains, while others fret that stocks are overbought and are due for a pullback. Also impacting sentiment are mixed views about the pace of economic growth and ongoing frustration with Washington.

This week’s special question asked AAII members which industries and sectors they like right now. Energy, including master limited partnerships, received the most votes, listed by 30% of respondents. Health care came in second with 23% of respondents favoring the sector, technology was a close third (21%) and financials came in fourth (14%). When we asked the same question last September, AAII members favored energy, health care, commodities and technology.

This week’s AAII Sentiment Survey results:

· Bullish: 35.5%, down 2.9 percentage points

· Neutral: 36.3%, up 3.4 percentage points

· Bearish: 28.2%, down 0.5 percentage points

Historical averages:

· Bullish: 39.0%

· Neutral: 30.5%

· Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.

 

Rail Traffic Continues 2013 at a Positive Pace

Rail traffic is continuing to show positive signs here as we head deeper into 2013.  Intermodal traffic was up 5.3% year over year which brings the 12 week moving average to a very healthy 4.84%.  That’s up from 1.3% earlier this year.

Here’s the AAR with more details:

“AAR also reported mixed rail traffic for the week ending Feb.16, 2013, with total U.S. weekly carloads of 278,596 carloads, down 1.2 percent compared with the same week last year. Intermodal volume for the week totaled 251,078 units, up 13.6 percent compared with the same week last year.  Total U.S. traffic for the week was 529,674 carloads and intermodal units, up 5.3 percent compared with the same week last year.

Three of the 10 carload commodity groups posted increases compared with the same week in 2012, with petroleum products, up 56.1 percent, and nonmetallic minerals and products, up 12.1 percent. Commodities showing a decrease were led by grain, down 14.3 percent.

For the first seven weeks of 2013, U.S. railroads reported cumulative volume of 1,891,569 carloads, down 5 percent from the same point last year, and 1,664,387 intermodal units, up 6.8 percent from last year. Total U.S. traffic for the first seven weeks of 2013 was 3,555,956 carloads and intermodal units, up 0.2 percent from last year.”

Chart via Orcam Investment Research:

Buffett’s Favorite Valuation Metric Surges Over the 100% Level

For the first time since the recovery began, Warren Buffett’s favorite valuation metric has breached the 100% level.  That, of course, is the Wilshire 5,000 total market cap index relative to GNP.  See the chart below for historical reference.

I only point this out because it’s a rather unusual occurrence and the recent move has been fairly sizable.  It happened during the stock market bubble of the late 90′s, but then occurred again just briefly during the 2006-2007 period when the valuation broke the 100% range in Q3 2006 and stayed above that range for about a year.  We all know what followed the 2007 peak in stock prices.

Here we are in this wonderful new world where everyone values nominal stock prices more than they value the actual output that underlies it.  If this indicator isn’t a sign that we are still residing in this Fed driven asset targeting mania then I don’t know what is.

To me, the whole thinking is backwards and more disruptive than anything else, but the party must go on.  Lord knows the Fed isn’t taking the punch bowl away any time soon.  So drink up.  Maybe you’ll get so drunk you’ll sleep through the inevitable bad parts when they arrive.

Chart via Orcam Investment Research:

China PMI Expands at Fastest Pace in 19 Months

More signs of stabilization in one of the world’s largest economies.   Today’s Chinese PMI rose to a 19 month high and solidly in expansionary territory (via Markit):

After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 51.5 in December, up from 50.5 in November, signalling a modest improvement of
operating conditions in the Chinese manufacturing sector. Moreover, it was the highest index reading since May 2011.

Commenting on the China Manufacturing PMI™ survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

“December’s final manufacturing PMI picked up for the fourth consecutive month to a 19-month high, thanks to the faster new business flows and the end of destocking. Such a momentum is likely to be sustained in the coming months when infrastructure construction runs into full speed and property market conditions stabilise. This, plus Beijing’s reiteration of keeping pro-growth policy in place into the coming year, should support a modest growth recovery of around 8.6% y-o-y in 2013, despite the ongoing external headwinds.”

Bullish Sentiment Rises to its Second Highest Level of the Year

By Charles Rotblut, CFA, AAII

Note: Our offices will be closed next week in observance of the holidays. I will be out from December 24 until January 7.

Bullish sentiment rose to its second-highest level of the year, as bearish sentiment fell for the fourth time in the past five weeks in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 3.2 percentage points to 46.4%. This is the highest level of optimism registered by our survey since February 9, 2012. It is also the fourth consecutive week that bullish sentiment has been above its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, rose 2.1 percentage points to 28.8%. Even with the increase, neutral sentiment remains below its historical average of 30.5% for the 10th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 5.3 percentage points to 24.8%. This is the lowest level of pessimism registered by our survey since February 9, 2012. It is also the first time bearish sentiment has been below its historical average of 30.5% on consecutive weeks since August 23, 2012.

Though bullish sentiment is near its high and bearish sentiment is near its low for the year, both remain well within their typical long-term ranges. Optimism seems high right now because pessimism has been above average for most of this year.

Individual investors’ short-term outlook for stock prices has improved over the past few weeks, however. A rebound in stock prices, monetary stimulus, continued economic growth and seasonality are all playing a role. Likely also helping is the crowding out of other potentially negative news headlines by the ongoing fiscal cliff negotiations.

This week’s special question asked AAII members how the Federal Reserve’s announcement of more bond purchases and introduction of an unemployment rate target impacted their sentiment towards stock. About 40% of respondents said it helps the stocks. Roughly 20% thought it would not have much of an impact. Some respondents said they thought the market has become dependent on monetary stimulus, inflation is a worry or that the recent announcement is bad for bond prices. A few respondents said the fiscal cliff negotiations are having a bigger impact on their short-term outlook.

This week’s AAII Sentiment Survey results:

· Bullish: 46.4%, up 3.2 percentage points

· Neutral: 28.8%, up 2.1 percentage points

· Bearish: 24.8%, down 5.3 percentage points

Historical averages:

· Bullish: 39.0%

· Neutral: 30.5%

· Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.

What is FedEx Telling us About the Global Economy?

Everyone always thinks that Alcoa kicks off the earnings season, but I don’t see it that way.  The real earnings season kicks off with FedEx who usually reports well in advance of Alcoa and gives us a much more meaningful look into the state of the economy.  So what’s the global bellwether telling us?  Here are some of the key highlights from their earnings report yesterday and the conference call:

  • Guidance for the full-year was in-line with expectations after last quarter’s big cut.  That could mean things are a bit more stable.  The outlook certainly isn’t deteriorating much.
  • Mike Glenn said they still see growth in the global economy:

“We continue to see modest growth in the global economy with our forecast for U.S. GDP calling for 1.9% growth in calendar year ’13. For industrial production, we expect a growth rate of 2.4% in calendar year ’13. This is slightly lower than our prior forecast, primarily reflecting a lower entry point in FY ’13 due to Hurricane Sandy. Our global GDP forecast is 2.5% in calendar year ’13. And finally, I just want to emphasize that the calendar year ’13 outlook could swing either direction depending upon policy outcomes, especially with the fiscal cliff issues in the U.S. and certainly issues in Europe.”

  • The European economy remains “weak”.  
  • High oil prices remain a big risk to their expenses and margins.  
  • Political uncertainty is not helping matters:

“the mounting uncertainty in the U.S. related to fiscal policies and their potential to impact earnings by further restraining economic growth is a concern.”

  • Operating margins were down just slightly. 
  • Revenues were decent at 5% year over year.   
  • Total US Domestic package shipments were down -2%.  This is an improvement over the last two quarters and more consistent with the low, but not negative economic growth we’re seeing in the US at present.  

Rail Traffic: Economy Continues to Soften

More weakness in this week’s rail traffic report.  The AAR reported a -0.3% reading in intermodal.  This is the second consecutive negative weekly reading.  This brings the 12 week moving average down to 1.3%.  That’s about in-line with the consensus Q4 GDP predictions and indicative of an economy that is growing, but just slightly.

Here’s more via AAR:

“The Association of American Railroads (AAR) today reported declines in weekly rail traffic for the week ending December 8, 2012, with U.S. railroads originating 292,206 carloads, down 1.6 percent compared with the same week last year. Intermodal volume for the week totaled 240,098 trailers and containers, down 0.3 percent compared with the same week last year.

Twelve of the 20 carload commodity groups posted increases compared with the same week in 2011, with petroleum products, up 59.5 percent; lumber wood and products, up 18.6 percent, and metallic ores, up 16.6 percent. The groups showing a decrease in weekly traffic included grain, down 15.3 percent; metals and products, down 11.9 percent, and coal, down 9.7 percent.

Weekly carload volume on Eastern railroads was down 0.5 percent compared with the same week last year. In the West, weekly carload volume was down 2.4 percent compared with the same week in 2011.

For the first 49 weeks of 2012, U.S. railroads reported cumulative volume of 13,888,035 carloads, down 3.0 percent from the same point last year, and 11,619,432 trailers and containers, up 3.2 percent from last year.”

(Chart via Orcam Investment Research)

Pessimism Falls to Lowest Level Since August

By Charles Rotblut, CFA, AAII

Bearish sentiment fell to its lowest level since last August, as bullish sentiment increased for the fourth consecutive week, according to the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 1.0 percentage points to 43.2%. This is the highest level of optimism registered by our survey since March 15, 2012. It is also the third consecutive week that bullish sentiment has been above its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rebounded by 3.5 percentage points to 26.7%. This is a seven-week high. Even with the increase, neutral sentiment is below its historical average of 30.5% for the 11th time in 13 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, dropped by 4.5 percentage points to 30.1%. This is lowest level of pessimism registered by our survey since August 23, 2012. It is also just the fifth time in the past 36 weeks that bearish sentiment is below its historical average of 30.5%.

The market’s rebound off of its mid-November lows is causing individual investors to be more optimistic about the short-term direction of stock prices. Also playing a role are further signs of economic growth, such as the November jobs report, and seasonality. It should also be pointed out that this week’s readings are fairly close to the historical average, implying that individual investors are neither unusually bullish nor bearish.

This week’s special question asked AAII members what influence the ongoing lack of a resolution to the fiscal cliff is having on their short-term outlook for stock prices. About one-third of respondents said the stalemate was having a negative impact, while another equally sized group said it wasn’t having any impact. Other respondents said the lack of resolution is causing them to be more cautious or that they expected stocks to stay range-bound until a resolution is reached. A few AAII members said they would view any fiscal cliff-related drop in stock prices as a buying opportunity. Several members expressed frustration with the politicians in Washington.

Here is a sampling of the responses:

· “This [the fiscal cliff negotiations] just adds to the volatility. Long-term investors should just ignore the noise.”

· “I’m a long-term investor. The so-called fiscal cliff has no impact on my investment decisions.”

· “Very bearish! It’s unbelievable our elected officials cannot come to some closure on this.”

· “I will hold off on buying; I believe the market will go down without a satisfactory solution.”

· “It makes me think the short-term (next month or so) will be volatile for stocks.”

· “I believe stocks will be down in the short term, but the fiscal cliff will be resolved and the market will go up.”

This week’s AAII Sentiment Survey Results:

· Bullish: 43.2%, up 1.0 percentage points

· Neutral: 26.7%, up 3.5 percentage points

· Bearish: 30.1%, down 4.5 percentage points

Historical averages:

· Bullish: 39.0%
· Neutral: 30.5%
· Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.

 

Rail Traffic is Slowing With the Economy

Rail traffic is taking a turn for the worse in recent weeks as the economy appears to be slowing even further into Q4.  The latest reading on intermodal traffic came in at -1.1%.   That brings the trailing 12 week average to 1.65%.  The US economy appears to be just barely treading water at this point.   This is also consistent with my latest update for Q4 GDP which is tracking at 1.1% (available via Orcam Investment Research).

Here’s more via the AAR:

“AAR today also reported declines in rail traffic for the week ending Dec. 1, 2012.  Last week U.S. railroads originated 305,708 carloads, down 2 percent compared with the same week last year, while intermodal volume for the week totaled 241,411 trailers and containers, down 1.1 percent compared with the same week last year.

Fourteen of the 20 carload commodity groups posted increases compared with the same week in 2011, with petroleum products, up 65.3 percent; metallic ores, up 27.2 percent, and iron and steel scrap, up 20.2 percent. The groups showing a decrease in weekly traffic included coal, down 12.7 percent; waste and nonferrous scrap, down 5.6 percent, and primary forest products, down 5 percent.

Weekly carload volume on Eastern railroads was down 2.1 percent compared with the same week last year. In the West, weekly carload volume was down 1.9 percent compared with the same week in 2011. “

Small Investor Optimism at Highest Level Since March

By Charles Rotblut, CFA, AAII

Bullish sentiment rose to its highest level since March 29, 2012, even as bearish sentiment stayed above its historical average for the 15th consecutive week in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 1.3 percentage points to 42.2%. This is both the highest level of optimism registered by the survey and the first time bullish sentiment has been above its historical average of 39% on consecutive weeks since last March.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 1.5 percentage points to 23.2%. This is the 10th time in 12 weeks that neutral sentiment is below its historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, edged up 0.2 percentage points to 34.6%. This is the 15th consecutive week and the 31st out of the last 35 weeks that bearish sentiment is above its historical average of 30.5%.

The short-term outlook among AAII members has improved dramatically since November 15, 2012, with bullish sentiment jumping 13.4 percentage points. A good start to the holiday shopping season and the market’s ability to hold steady despite continued uncertainty about the outcome of budget and tax negotiations in Washington are helping to boost optimism.

Seasonality may also be playing a role. In a report last week, Sam Stovall, the chief equity strategist for S&P Capital IQ, said December has the highest monthly average bullish sentiment readings. According to Stovall, since our survey started in 1987, bullish sentiment has averaged 41.8% in December. December also ranks number one in terms of S&P 500 performance. Stovall calculates an average December monthly gain of 1.36% for the S&P 500, using data dating back to 1900.

Even with the improvement in bullish sentiment, it is worth noting that bearish sentiment continues to stay at above-average levels. Failure by Congress and the president to avoid the fiscal cliff would likely have a damaging impact on individual investors’ moods, especially if it seemed that the standoff would be protracted. Furthermore, many AAII members remain concerned about the pace of economic growth, ongoing political gridlock and Europe’s sovereign debt crisis.

This week’s special question asked AAII members for their opinions about companies declaring special dividends or paying their typical first-quarter dividend before the end of this year. The majority of survey respondents said such actions were a good idea given the possibility of higher tax rates next year. Several respondents differed, however, saying that the actions benefited executives and large shareholders, were a ploy to attract new shareholders or may not be the best use of company resources. A small group of respondents were indifferent, saying these actions will have no lasting impact. Several AAII members pointed to the ongoing gridlock over the fiscal cliff as the reason for the special dividends and the accelerated dividend payments.

Here is a sampling of the responses:

· “Given the uncertainty about tax reform, this may be a good approach for both the companies and investors.”

· “Great. Less potential tax to pay to the IRS.”

· “I think it is fine so long as the companies are not borrowing to make the dividend payments.”

· “I’m not against it. I really wish, though, we had a political system that absolutely worked for all of us citizens.”

· “It is more in the interest of the CEOs and board of directors than in the interest of the average shareholder.”

· “I think it is short-sighted and a bad idea.”

This week’s AAII Sentiment Survey results:

· Bullish: 42.2%, up 1.3 percentage points

· Neutral: 23.2%, down 1.5 percentage points

· Bearish: 34.6%, up 0.2 percentage points

Historical averages:

· Bullish: 39.0%
· Neutral: 30.5%
· Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.

The Wall of Worry in Inflation

There’s a popular saying that stocks climb a wall of worry.  But one could also say that bonds also climb a wall of worry.  A wall of worry over inflation.  For years (really decades), there have been persistent fears of surging inflation.  And those fears just never come to fruition.  That doesn’t mean they can’t come to fruition in the future, but I do find these comments by Richard Bernstein apt:

“There appears to be a wall of worry with respect to inflation as well. It is unfortunate that investors have listened to politicians because printing money does NOT cause inflation. Economic textbooks say that printing money and using it to create excess credit causes inflation. The US is certainly printing money, but credit creation could hardly be called active let alone excessive. Thus, we view the risk of meaningful inflation as still quite low.

However, investors continue to perceive inflation risk to be very high. Our models currently suggest that investors are pricing nearly 6% inflation over the next twelve months into the valuation of the stock market. As Chart 5 shows, such expectations have nearly always been too pessimistic. The stock market appears to be climbing the inflation wall of worry as well.”

Goldman Sachs Cuts Q4 GDP Forecast to 1%

By Walter Kurtz, Sober Look

As discussed earlier (see post), US manufacturing data for November shows shrinking inventories. This is true for both the ISM survey as well as the Markit PMI index (see figures below).

Goldman looks at the change in private inventories (also called “inventory investment”) as a good predictor of GDP growth. The Q3 GDP exhibited relatively strong inventory accumulation, which is being reversed this quarter (as the charts above show).

GS: – Inventory investment is often an important contributor to quarterly fluctuations in real GDP. Most recently, real GDP growth in Q3 saw a sizable boost from inventory accumulation. … Given the soft early indicators from business sentiment surveys to date, and our own econometric analysis, we expect that the boost to GDP growth from inventory investment seen last quarter will not persist into Q4. Inventories will probably be a moderate drag on GDP growth into year-end.

The recent decline in the series is consistent with a moderation in inventory investment in the current quarter, and hence a decline in the contribution from inventory investment to real GDP growth. A simple regression of quarterly inventory investment on our indicator [R-squared = 0.8] suggests that inventory accumulation could fall by $34 billion in Q4 ($135 billion at an annual rate) to $27 billion, enough to detract roughly a full percentage point from Q4 real GDP growth if taken at face value.

This reduction of inventories (which to a large extent is driven by the impasse in Washington) resulted in Goldman’s downgrade for Q4 GDP forecast to 1% (annualized rate). What makes this anemic growth projection particularly painful is that it is likely caused (see discussion) by the political gridlock over issues that have been well telegraphed for quite some time (see discussion). The irresponsible behavior of politicians is not surprising, but sad nevertheless.

ISM Inventories index (source: ISM)

US Markit PMI Inventories Index (orange line, source: JPMorgan)

 

The ISI Tech Survey Weakness Not Yet Reflected in the Market

By Walter Kurtz, Sober Look

The ISI Tech Company Index (see discussion) shows continuing weakness. The survey, which is heavily weighted towards US semiconductor firms, is now at the lows of 2008/09. It seems that firms have been postponing spending on equipment and to a lesser degree on software. The obvious explanation is the uncertainty in Washington.

So far this weakness has not been reflected in the equity markets. The PHLX Semiconductor (SOX) index is definitely off the highs but is still up for the year. At some point (probably within the next couple of months), either the sentiment in the industry will begin improving or we will see a selloff in the tech sector. Companies manufacturing and servicing business tech equipment (as opposed to retail) are particularly vulnerable.

Source: ISI Group

 

Bullish Sentiment Jumps Above 40%

By Charles Rotblut, CFA, AAII

Bullish sentiment registered above 40% for the first time since August 23, 2012 in the latest AAII Sentiment Survey. Bearish sentiment continues to stay above its historical average, however.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 5.1 percentage points to 40.9%. This reading ends a 13-week streak of optimism coming in below its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, edged up 1.3 percentage points to 24.7%. Even with the increase, this is the 10th time in the past 11 weeks that neutral sentiment is below 30%. The historical average is 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 6.4 percentage points to 34.4%. This is an eight-week low. Even with the drop, pessimism is above its historical average of 30.5% for the 14th consecutive week and the 30th out of the last 34 weeks.

More individual investors are describing themselves as bullish than bearish for just the second time in the past 10 weeks. The bull-bear spread, which measures the difference between bullish and bearish sentiment, is also at its most positive level since August 23, 2012. The current bull-bear spread is 6.5.

Though this week’s survey signals an increase in the level of optimism, it is important to note that this is only the second time since March 29, 2012, that bullish sentiment is above its historical average of 39%. Individual investors remain cautious and failure by Congress and the president to avoid the fiscal cliff would likely have a damaging impact on individual investors’ moods. Though some AAII members are encouraged by signs of continued economic growth and the preliminary holiday shopping data, many remain concerned about the pace of economic growth, ongoing political gridlock and Europe’s sovereign debt crisis.

This week’s special question asked AAII members what this year’s holiday shopping trends are saying about the economy. Responses were mixed, with the largest group of respondents saying the early data shows signs of an improving economy, or at least better consumer sentiment. Several members thought consumers are either ignoring the macro environment (including the possibility of the fiscal cliff fears) or are just tired of not spending. Some respondents are worried that consumers are spending money they do not have. There were also several who thought the initial data did not provide much insight into the overall health of the economy.

Here is a sampling of the responses:

“With holiday spending up slightly, consumers are not letting the fiscal cliff threat spoil their holidays.”
“I’m encouraged by the volume of shoppers reported by the media, but I hope that folks are not spending themselves back into difficult situations.”
“Consumers have become more willing to spend.”
“Consumers don’t have much “extra” money, so they are shopping for the lowest priced products.”
“It is very hard to tell as of now, but aside from Black Friday, I feel that people are being careful with their money.”
“Black Friday does not a shopping season make.”

The historical average for neutral sentiment was adjusted down by a half a percentage point this week, from 31% to 30.5%. The historical average for bearish sentiment was revised up, from 30% to 30.5%. These revisions reflect a trend we have seen develop in the weekly readings. Over time, we make additional adjustments to the historical averages as the data warrants.

This week’s AAII Sentiment Survey results:

Bullish: 40.9%, up 5.1 percentage points
Neutral: 24.7%, up 1.3 percentage points
Bearish: 34.4%, down 6.4 percentage points

Historical averages:

Bullish: 39.0%
Neutral: 30.5%
Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.