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Two new reports about the sentiment and behavior of investors paint a muddled picture.
Yesterday we heard from the ICI that mutual-fund investors had yanked a gobstopping $9.3 billion out of equity funds in the week ending January 4.
Altogether investors have pulled more than $172 billion out of stock funds since last May, a sign of investors’ widespread disgust with an equity market that increasingly appears rigged, dominated by insane robots or both.
But then today the AAII says its reading of individual-investor sentiment just hit a level of extreme bullishness not seen since last February.
What gives?
For one thing, these are two different universes being measured here. The AAII survey talks to individual investors who are members of AAII, a self-selecting group that may not necessarily be putting money into mutual funds but rather taking positions in individual stocks.
The ICI, on the other hand, measures flows into mutual funds, which could be coming from anywhere. It likely uses a larger sample and possibly gives a better guide to how truly bullish or bearish investors are on equities.
A helpful reader, Bard Luippold, corporate finance manager at Meracord in Tacoma, Washington, last week ran an analysis on how useful extreme AAII readings are as a contrarian indicator.
Suffice to say: Not really. When bearish sentiment is 1.3 standard deviations below its average, as it was last week (and still essentially is now), you only get statistically significant lower-than-usual market returns 10 weeks out. There’s not much difference under any other time frame.
When you stretch out the standard deviation to two — meaning episodes of bullishness that have occurred only 8 times in the past 24 years — the AAII reading becomes a little more useful as a contrarian indicator. “Trading this indicator is risky, though,” Luippold writes, because of a lot of noise in the data.
Another way of looking at it: These bullish AAII people might be on to something.
Doug Kass of Seabreeze Partners Management, who is bullish on the market this year, has been writing for a while about how the money flowing out of funds in recent years is a better indicator than AAII and other such sentiment indicators.
In a note today he says, “most investors remain skeptical (measured by what they do, not what they say!),” and he thinks those on the sidelines will be inexorably sucked back into the market as it moves higher and they start to worry about missing out.
Today could be an example of the sort of force he’s talking about — the market barely sold off following this morning’s disappointing economic data, giving the skeptics little chance to buy into stocks at a discount.
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Light volume + Freshly printed cash from Fed = artificially inflated stock market + overpriced commodities
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MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. MarketBeat lead writer Mark Gongloff spearheads the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com or write Mark at mark.gongloff@wsj.com.
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