Download - January 2013 Global Tactical Asset Allocation Equities Sentiment

Clue6 January 2013

January 11th , 2013

Damien Cleusix

[email protected]

Global Tactical

Asset Allocation

GTAA

Equities / Sentiment

Clue6 January 2013

1 Equities: Sentiment – Surveys

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.

S&P 500 and AAII Bull Ratio Chart 2

Source: AAII, Clue6 Source: Investor Intelligence, Clue6

Investor Intelligence Bull/Bear Ratio Chart 1

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II Bull Ratio S&P 500

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AAII Bull Ratio S&P 500

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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.

NAAIM Survey Lowest Quintile Average Chart 4

Source: NAAIM, Clue6 Source: NAAIM, Clue6

NAAIM Survey

Chart 3

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NAAIM Survey Standard Deviation S&P 500

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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.

TSP Survey Chart 6

Source: TSP, Clue6 Source: NAAIM, Clue6

NAAIM Survey 25% at or above Chart 5

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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.

Shiller’s Buy-On-Dips Confidence Index Chart 8

Source: R. Shiller, Clue6 Source: R. Shiller, Clue6

Shiller’s Crash Confidence Index Chart 7

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Buy-On-Dips Confidence Index - Individual

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Crash Index - Individual

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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).

ML Fund Managers Survey Hedge Fund

Positioning Chart 10

Source: Merrill Lynch Source: Merrill Lynch

ML Fund Managers Survey Risk &

Liquidity Composite Chart 9

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Managers are overweighting the US (Chart 11).

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

ML Fund Managers Survey Percentage Net

Overweight Europe Chart 12


ML Fund Managers Survey Percentage

Net Overweight USA Chart 11

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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?

ML Fund Managers Survey Percentage Net

Overweight Emerging markets Chart 14


ML Fund Managers Survey Percentage

Net Overweight Japan Chart 13

Clue6 January 2013

8 Equities: Sentiment – Put Call Ratios

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.

S&P 500 and OEX Open Interest PC Ratio Chart 16

Source: Clue6 Source: Clue6

S&P 500 and OEX PC Ratio Chart 15

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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

SX5Eand SX5E Open Interest CP Ratio Chart 18


SX5E and SX5E PC Ratio Chart 17

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NIKKEI and NIKKEI Open Interest CP Ratio Chart 20


Nikkei and Nikkei PC Ratio Chart 19

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Nikkei

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


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).

S&P 500 and Small Traders Buy to Open Put/Call Ratio Chart 22

Source: OCC, Clue6 Source: OCC, Clue6

S&P 500 and Small Traders Option Activity Chart 21

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Buy to Open Put Sell to Open Call Sell to Open Put

Buy to Open Call S&P 500 (rhs)

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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).




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Sell to Open Call S&P 500 (rhs)

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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.




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Clue6 January 2013

14 Equities: Sentiment – Implied Volatility

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).

EuroStoxx 50 and 3M 90/110 Skew and VDAX Chart 28


S&P 500 3M 90/110 Skew and VIX Chart 27

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15 Equities: Sentiment – Insiders

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 decline…

Canadian Insiders Buy/Sell Ratio Chart 30

Source: InkResearch Source: Bloomberg, Clue6

S&P 500 and Russell 3000 Insiders Chart 29

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16 Equities: Sentiment – Insiders

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.

Number of Companies with Directors’

Buying and Selling Chart 32

Source: DB

Net Directors’ Buying with Transaction Capped at 1

EUR mio. (in ‘000s EURO) Chart 31

Source: DB

Clue6 January 2013

17 Equities: Sentiment – Smart Money

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).

S&P 500 and Leuthold Core Beta Exposure Chart 34


S&P 500 and Hussman Strategic Growth Beta Exposure Chart 33

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Clue6 January 2013

18 Equities: Sentiment – Smart Money

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).

MSCI EM and Dow Jones Credit Suisse Blue Chip Emerging

Markets Hedge Fund Index Beta Exposure Chart 36

Source: Dow Jones Credit Suisse, Clue6 Source: Dow Jones Credit Suisse, Clue6

MSCI World and Dow Jones Credit Suisse Blue Chip

Global Macro Hedge Fund Index Beta Exposure Chart 35

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Clue6 January 2013

19 Equities: Sentiment – Smart/Dumb Money

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).

S&P 500 and Non Reportable Net Long Equity

Futures (in usd bio.) Chart 38

Source: Bloomberg, Clue6 Source: Bloomberg, Clue6

Nasdaq 100 and Non-Commercial Net Long Future Position Chart 37

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20 Equities: Sentiment – Dumb Money

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).

Source: G.Lerner

ProShare Short ETF Total Shares Outstandings Chart 39 Rydex Leveraged Bull to Bear Assets Chart 40

Source: G. Lerner

Source: Bloomberg, Clue6

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21 Equities: Sentiment – Volatility

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).

S&P 500 and CFTC VIX Large Speculator Net Position Chart 42

Source: Bloomberg, Clue6 Source: Bloomberg, Clue6

S&P 500 and Vix Time-Spread Chart 41

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Equities: Sentiment 22

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

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Source: Clue6