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January 2013 Global Tactical Asset Allocation Equities Sentiment

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Behavioral analysis of the Global Equity Markets
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Global Tactical Asset Allocation

GTAAEquities / SentimentJanuary 11th , 2013

Damien Cleusix [email protected]

Clue6

January 2013

Equities: Sentiment SurveysChart 1120%

1Chart 2

Investor Intelligence Bull/Bear Ratio1800

S&P 500 and AAII Bull RatioAAII Bull Ratio S&P 5001800

II Bull Ratio110% 100% 90%

S&P 500140%

1600 1400 1200

1600

120%

1400

1200 100%

80%

100070% 800 60% 600 50%60% 80%

1000

800

600

40%30% 20%

400 200 020% 40%

400

200

0

Source: Investor Intelligence, Clue6

Source: AAII, Clue6

As we have always said, most indicators have to be analyzed in

the context of the cyclical trend.

The Investor Intelligence surveys (Chart 1) Bull Ratio is rebounding rapidly toward the 70% level. The American Association of Individual Investors (Chart 2) surveys has been very volatile in the past 4 years. The Bull Ratio is now too high for our comfort.

Clue6

January 2013

Equities: Sentiment SurveysChart 3120

2Chart 4

NAAIM Survey1800

NAAIM Survey Lowest Quintile AverageNAAIM Survey S&P 500

NAAIM Survey100

Standard Deviation

S&P 5001600

90

70

80

1400

50

1200 3060 1200

1040 1000

-10

20

800

-30

0

600

-50

600

Source: NAAIM, Clue6

Source: NAAIM, Clue6

The National Association of Active Investment Managers allocation survey is above 85% (It means that managers are recommending, on average, an 85% net long exposure) with a relatively low diffusion of answers (Chart 3). It indicates conviction. On Chart 4 one can see that the average exposure of the surveyed lowest quintile is almost 70%. It indicates that there is no fear.

Clue6

January 2013

Equities: Sentiment SurveysChart 5NAAIM Survey 25% at or above4.0120

3Chart 6

TSP Survey

Tsp SurveyNAAIM Survey S&P 5003.5

S&P 500

100

3.0

80 1200

2.5

12002.0

60

1.540

1.020

0.5

0

600

0.0

600

Source: NAAIM, Clue6

Source: TSP, Clue6

On Chart 5 one can see the average exposure of the surveyed highest quintile is high. The TSP Bull/Bear Survey (Chart 6) is not indicating too much bullishess. Note that the Hulbert Newletter Surveys (Nasdaq and Dow) are indicating excess optimism too.

Clue6

January 2013

Equities: Sentiment SurveysChart 770

4Chart 880

Shillers Crash Confidence IndexCrash Index - Institutional Crash Index - Individual

Shillers Buy-On-Dips Confidence IndexBuy-On-Dips Confidence Index - Institutional Buy-On-Dips Confidence Index - Individual

60

75

70 50 65 40 60 30

55 20 5010

45

0

40

Source: R. Shiller, Clue6

Source: R. Shiller, Clue6

The crash confidence index (Chart 7) measures the percent of the population who attach little probability to a stock market crash in the next-six months. We are far off the excess of 2004-2007 but have rebounded from the 2009 and 2011 lows. The analysis of this index is tricky Low levels occurring after prolonged decline are bullish, but you want the index to rise strongly along the markets (remember the crowd is wrong at the end of the trend not during a trend). The buy-on-dips index (the percent of the population expecting a rebound the next day should the market ever drop 3% in one day) (Chart 8) is reaching 2006-7 lows.

Clue6

January 2013

Equities: Sentiment SurveysChart 9ML Fund Managers Survey Risk & Liquidity Composite Chart 10

5ML Fund Managers Survey Hedge Fund Positioning

Source: Merrill Lynch

Source: Merrill Lynch

The ML Fund Managers Survey Risk & Liquidity Composite is the combination of the risk appetite, investor time-horizon and cash weightings level (Chart 9). It is reaching disturbingly high levels. Cash balance has fallen to 4.1%. There are a net 40% of respondents who are overweight equity (> net 50% underweight at the 2009 lows). Hedge Funds are not yet using as much leverage as they did in 2006-2007 but the ratio has increased substantially since the 2009 lows. Their net long position is surpassing its 2007 highs(Chart 10).

Clue6

January 2013

Equities: Sentiment SurveysChart 11ML Fund Managers Survey Percentage Net Overweight USA Chart 12

6ML Fund Managers Survey Percentage Net Overweight Europe

Source: Merrill Lynch

Source: Merrill Lynch

Managers are overweighting the US (Chart 11).

And are back to an overweight Europe position (Chart 12).

Clue6

January 2013

Equities: Sentiment SurveysChart 13ML Fund Managers Survey Percentage Net Overweight Japan Chart 14

7ML Fund Managers Survey Percentage Net Overweight Emerging markets

Source: Merrill Lynch

Source: Merrill Lynch

Japanese stocks are very underweighted again (Chart 13). Even if analysts are starting to talk about it, we believe overweignt Japanese equities (hedged) will be one of the best trade in the next few years. Emerging Markets relative exposure is high (Chart 14). Could we see an accident in this space in 2013?

Clue6

January 2013

Equities: Sentiment Put Call RatiosChart 157

8S&P 500 and OEX Open Interest PC RatioOEX Open Interest Put Call Ratio MA S&P 500

S&P 500 and OEX PC Ratio1800

Chart 162.5

OEX Put Call Ratio MA6

S&P 50016002

1400 5 1200

1200

4

1.5

1000

3

8001

600 2 4000.5

1 200

0

0

0

600

Source: Clue6

Source: Clue6

The OEX put call ratio (Chart 15) has risen to above 2 plenty of times in the past 6 months. This is a warning of a nearing top which has rarely failed, if ever in the past.

The open interest OEX put call ratio (Chart 16) remains high.

Clue6

January 2013

Equities: Sentiment Put Call RatiosChart 172.71.5

9SX5Eand SX5E Open Interest CP RatioSX5E Open Interest Put to Call Ratio

SX5E and SX5E PC RatioSX5E Put to Call Ratio1.6

Chart 18

SX5E6000

6000 2.2

1.4

1.3

1.7

1.2

1.130003000

1.2

1

0.9

0.7

0.8

0.7

0.2

1500

0.6

1500

Source: Clue6

Source: Clue6

The Eurostoxx 50 put call ratio (Chart 17) has risen sharply in the past few months. The open interest put call ratio (Chart 18) is reaching worryingly high levels

Clue6

January 2013

Equities: Sentiment Put Call RatiosChart 192.3

10NIKKEI and NIKKEI Open Interest CP RatioNikkei Open Interest Put to Call Ratio Nikkei

Nikkei and Nikkei PC Ratio2.4

Chart 20

Nikkei Put to Call Ratio2.1

2.2

Nikkei2

1.91.8

1.7

12000 1.5

1.6

12000

1.3

1.4

1.1

1.2

0.9

1

0.7

0.8

0.5

6000

0.6

6000

Source: Clue6

Source: Clue6

The Nikkei put call ratio (Chart 19) is at a very low level which is a bullish sign. The open interest call put ratio (Chart 20) has risen slightly but remains extremely low which is a positive.

Clue6

January 2013

Equities: Sentiment Put Call RatiosChart 21100% Buy to Open Put 90% 80% 1,450 70% 60% 1,250 50%0.60 0.80 1.00

11S&P 500 and Small Traders Buy to Open Put/Call Ratio1,700

S&P 500 and Small Traders Option Activity1.40

Chart 221,6501.20

Sell to Open Call S&P 500 (rhs)

Sell to Open Put

Small Trader Buy to Open Put-Call1,600

Buy to Open Call

1,5001,400 1,300 1,200 1,100 1,000 900 0.20

40% 30% 20% 10% 0%

1,0500.40

850

800

650

0.00

700

Source: OCC, Clue6

Source: OCC, Clue6

Small traders (up to 10 contracts traded) activity is now more concentrated into bullish bets (54%) (Chart 21). The buy to open put call ratio is below 0.6 (Chart 22).

Clue6

January 2013

Equities: Sentiment Put Call RatiosChart 23S&P 500 and Small Traders Option Activity45%

12S&P 500 and Small Traders Option Activity1,650

Chart 241,650

Buy to Open Put30%

S&P 500 (rhs)

Sell to Open Call40%

S&P 500 (rhs)

1,450 25% 35% 1,250 30% 20% 1,050 25%

1,450

1,250

1,050

15% 850 20% 850

10%

650

15%

650

Source: OCC, Clue6

Source: OCC, Clue6

Buy to open put activity is at 16% (Chart 23). Not urgency to protect the downside seems to be the norm. Sell to open call activity is high (Chart 24).

Clue6

January 2013

Equities: Sentiment Put Call RatiosChart 2550%

13S&P 500 and Small Traders Option Activity1,650

S&P 500 and Small Traders Option Activity

Chart 261,650

Buy to Open Call45%

S&P 500 (rhs)

24%

Sell to Open Put22%1,450 40% 1,250 18% 35% 16% 20%

S&P 500 (rhs)

1,450

1,250

1,050 30%

1,050

14% 25% 850 12% 850

20%

650

10%

650

Source: OCC, Clue6

Source: OCC, Clue6

Buy to open call activity is relatively low at less than 30% (Chart 25). Sell to open put activity is high at 24% (Chart 26) and it would not if people were worried about a potential waterfall decline.

Clue6

January 2013

Equities: Sentiment Implied VolatilityChart 27S&P 500 3M 90/110 Skew and VIX1700 S&P 500 3M 90/110 Skew VIX-10 S&P 50014

14EuroStoxx 50 and 3M 90/110 Skew and VDAX5100

Chart 28

EuroStoxx 50 3M 90/110 Skew

VDAX -10

EuroStoxx 504600

19 150017 1300 15 1100 13 900 11

4100 12 3600

3100 10 2600

700

2100 8 1600

9

5006 1100

7

300

600

5

100

4

100

Source: Clue6

Source: Clue6

The option skew is the shape of an asset option implied volatility along the strike for a given maturity. In the above charts we are looking at the absolute difference of the implied volatility of 3 months put options with a strike at 90% of the current price and 3 months call options with a strike at 110% of the current price. The higher the level the more expensive puts are relative to calls i.e. the more nervous investors are. The S&P 500 skews has declined in the past few months (Chart 27). It remains highs compared to the Vix which is a negative divergence for the markets. The same is true for Europe (Chart 28).

Clue6

January 2013

Equities: Sentiment InsidersChart 291,800 Russell 3000 Sell/Buy Ratio 1,600 1,400 S&P 500

15Chart 30

S&P 500 and Russell 3000 Insiders14 12 10 8

Canadian Insiders Buy/Sell Ratio

1,200 61,000 800 4 2

600100 8060 40 20 Russell 3000 Insiders Buy (lhs) Russell 3000 Insiders Sell

0100 90 80 70 60 50 40 30 20 10 0

0

Source: Bloomberg, Clue6

Source: InkResearch

The Russell 3000 sell/buy ratio has been very high in December (Chart 29). Insiders fearing a rise in capital gain taxes have probably contributed to the selling. In Canada, the buy/sell ratio has been increasing since its October lows (Chart 30).

Remember, insiders activity is especially useful in 2 configurations: lots of relative buying or increased selling when the markets declineClue6 January 2013

Equities: Sentiment InsidersChart 31Net Directors Buying with Transaction Capped at 1 EUR mio. (in 000s EURO) Chart 32 Number of Companies with Directors Buying and Selling

16

Source: DB

Source: DB

Europe buying pressure is low (Chart 31-32). Note that insiders were wrong during the whole bear market in 2007-2009. Local spikes have predictive powers and we seems to have one at the moment.

Clue6

January 2013

Equities: Sentiment Smart MoneyChart 331.15

17S&P 500 and Leuthold Core Beta Exposure1800

S&P 500 and Hussman Strategic Growth Beta Exposure1800

Chart 342

S&P 500

50 per. Mov. Avg. (Rolling beta)1600

S&P 500

50 per. Mov. Avg. (Rolling beta)1600

1400 0.65

1.5

1400

1200

1200 1

1000 0.15

1000

800

800 0.5

600

600

-0.35

400

0

400

200

200

-0.85

0

-0.5

0

Source: Clue6

Source: Clue6

J. Hussman is, according to our calculation, currently fully hedged (Chart 33). He continues to have a substantial exposure to high quality, cash generating, large caps stocks. S. Leuthold, who has been lowering its exposure substantially in the past few months (Chart 34).

Clue6

January 2013

Equities: Sentiment Smart MoneyChart 351

18MSCI EM and Dow Jones Credit Suisse Blue Chip Emerging Markets Hedge Fund Index Beta Exposure500

MSCI World and Dow Jones Credit Suisse Blue Chip Global Macro Hedge Fund Index Beta Exposure1800

Chart 360.8

MSCI World (usd)0.8

10 per. Mov. Avg. (Rolling beta)

MSCI EM (usd)

10 per. Mov. Avg. (Rolling beta)450

1600 0.6

0.6 400

350 0.4 1400

0.4300

0.21200 0 200 -0.2 1000 0 150 -0.4 100 800 -0.6 -0.2 50 0.2 250

-0.8

600

-0.4

0

Source: Dow Jones Credit Suisse, Clue6

Source: Dow Jones Credit Suisse, Clue6

Global macro hedge funds exposure to equity markets (the correlation is such between assets that we should say exposure to the reflation trade) is one of the highest in the past 8 years(Chart 35). Once the exposure move to an extreme and form a divergence with the markets, a counter-trend move or trend change is not far away. Note that we have a divergence. The same is true for emerging markets hedge funds (Chart 36).

Clue6

January 2013

Equities: Sentiment Smart/Dumb MoneyChart 37200000

19S&P 500 and Non Reportable Net Long Equity Futures (in usd bio.)S&P 500

Nasdaq 100 and Non-Commercial Net Long Future PositionNasdaq Non-Commercials Net Long Nasdaq 100

Chart 38150,000

Non-Reportables Aggregate Net Long Position130,000

150000110,000 2800 90,000 70,000 1300

100000

50000

50,00030,000

0

1400 10,000 (10,000)

-50000(30,000)

-100000

700

(50,000)

650

Source: Bloomberg, Clue6

Source: Bloomberg, Clue6

Non-Commercial have a small net long position in Nasdaq futures (Chart37). Non-reportable have a small net long position in US equity futures (Chart 38).

Clue6

January 2013

Equities: Sentiment Dumb MoneyChart 399,000,000 SQQQ 8,000,000 1600 7,000,000 6,000,000 5,000,000 1200 4,000,000 3,000,000 2,000,000 800 1,000,000 0Source: G.Lerner

20Rydex Leveraged Bull to Bear Assets

ProShare Short ETF Total Shares Outstandings1800 QID PSQ SPXU SDS SH S&P 500

Chart 40

1400

1000

600Source: G. Lerner

Source: Bloomberg, Clue6

Proshare short ETF total shares outstanding have been declining rapidly in the past few weeks (Chart 39). It indicates bears being squeezed out or throwing the towel precisely at the wrong moment. Rydex leveraged (and unleveraged) assets are indicating a high level of optimism (Chart 40).

Clue6

January 2013

Equities: Sentiment VolatilityChart 411.30

21Chart 4220,000.0

S&P 500 and Vix Time-Spread

S&P 500 and CFTC VIX Large Speculator Net Position128.00

VIX Time-Spread1.25

S&P 5000.0

VIX Non-Commercial Net Positon

VIX

1.2064.00

1.15 1.10 1200 1.05 1.00 0.95 0.90

-20,000.0

-40,000.0 32.00 -60,000.0

-80,000.0 16.00

-100,000.0

0.85 0.80 600

-120,000.0

8.00

Source: Bloomberg, Clue6

Source: Bloomberg, Clue6

The VIX time-spread has risen sharply in the past 3 weeks and is now approaching levels where markets top during bear markets (Chart 41). Non-commercials have built a huge net short position VIX future (Chart 42). It could contribute to a huge short squeeze with ricochet effect on stocks and vice versa (the very high level of margin debt and negative free credit at brokers would not help).

Clue6

January 2013

Equities: SentimentSentiment Composite1.8

22

S&P 500

1600

1400 0.8 1200

-0.2 1000

-1.2 800

Source: Clue6

-2.2

600

The sentiment Composite is reaching high level in the context of a mature (dying) cyclical bull market.

Clue6

January 2013

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Clue6 January 2013 January 11 th , 2013 Damien Cleusix [email protected] Global Tactical Asset Allocation GTAA Equities / Sentiment
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