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HURRICANES ARE, AMONG OTHER things, God's perennial gift to television news producers in the brutal late-summer news lull. Dispatch a correspondent and a windbreaker to a beach with roiling surf–especially if you can find a locale called Kill Devil Hills on the Outer Banks–and you can create suspense that feels like news even if the prospect of landfall is remote.
Similarly, the portentous annual recitation of the seasonally unfriendly stock-market weather in September and, to a lesser degree, October, are annually deployed in the service of financial journalists and investment strategists to fill the pre-Labor Day content void. And, once again, the ratio of real disasters to ominous, windblown warnings isn't all that high.
THERE IS, OF COURSE, A CORE OF LOGIC, precedent and plausibility behind this welling up of worry about what the next month or two might hold. September is, back through the ages, the only month that has averaged a negative return. Septembers in midterm-election years have been even worse than average.
Here's arguing, though, that this particular year, investors collectively have overanticipated the potential for catastrophic market damage in the next several weeks. Let's count the ways.
First off, August was lousy, so the market has perhaps front-run the seasonal difficulties, amid pervasive gloom about the economic climate. Week before last, the poll of American Association of Individual Investors members showed the lowest percentage of bullish respondents since March 5, 2009, essentially at the moment of the 2009 low. The bullish percentage rebounded a bit this past week, but still lagged behind the number of bears.
Ned Davis Research's "crowd sentiment poll" showed a parallel degree of pessimism, as did the Rydex/SGI Advisor Confidence Index, a measure of investment-advisor psychology that hit a 16-month low in August. Meantime, corporate insiders have all but quit selling shares of their employers.
For months now, the options-trading crowd has been bidding for protection against a burst of volatility this month and next, which is reflected in stubborn premiums in the prices of futures contracts on the CBOE Volatility Index (VIX). This isn't a pure contrarian indicator, but last year a similar pattern was in place and didn't prove an accurate market warning for months. At minimum, this setup hints that any market turmoil would come as little surprise to the active-trader crowd.
Bloomberg News reported last week that the number of Buy ratings among brokerage-firm analysts has reached a low not seen since 1997. Yet, much like the broader investor attitude, this doesn't reflect so much an aggressive and active bearish bet as a general "apathy trade" toward stocks as an asset class. Indeed, Sell ratings are also near a decade low. It's the Hold ratings – the epitome of the shrugged-shoulders lack of conviction among stock handicappers – that sit near a record high of 66%.
It's not that the fear and gloom are as palpable as at the March 2009 market lows, but it's arguable that the level of anxiety has been excessive given what the market itself has done. The average closing level of the Standard & Poor's 500 this year was 1117 through Thursday – two points above where it ended 2009 and less than 2% above Friday's close. Yet to listen to investors, one would think the market has melted down.
FLOWS INTO AND OUT OF FUNDS , and new investment-product launches, tell a story compatible with the apathy trade notion. A net $42 billion has flowed out of U.S. stock mutual funds since April 2009, while a net $450 billion found its way into bond funds.
And the most avidly promoted new exchange-traded-fund products have centered on ways to promote volatility itself as an asset class, or to showcase income sectors such as master limited partnerships–both examples of the financial-services industry serving up what would have been exceedingly profitable if offered a few years ago.
This same apathy trade means that the supply/demand balance for stocks could remain unfavorable, or get worse, naturally. Fright, risk-aversion and global-growth doubts could easily cost the market 10% in a hurry. And there's no denying the long-term headwinds of excessive government debt and hamstrung fiscal policy. But with the major indexes at levels first reached 12 years ago, with stocks having underperformed bonds for every period captured by most active investors' memory and with most investors worrying far more about the path of public policy than the market itself typically does, it seems that public psychology has effectively pulled forward the long-lived concerns to the present.
E-mail: michael.santoli@barrons.com
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