Saturday, May 07, 2016

Broad Based Bearish Market Sentiment

With the 'sell in May' topic seeming to lead much of the commentary over the last few weeks, investors are exiting equities and allocating the funds to money market and fixed income investments. During this first week in May, Lipper notes:
  • For the week fund investors were net redeemers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), pulling out a net $2.8 billion for the fund-flows week ended Wednesday, May 4.
  • While investors were net sellers of equity funds (-$11.2 billion, the largest weekly net redemptions since January 6, 2016), they padded the coffers of money market funds (+$6.5 billion), taxable bond funds (+$1.1 billion), and municipal bond funds (+$0.7 billion).
As the below chart indicates, equity outflows have been fairly steady since April of last year and accelerated in December.

This reduction in equities matches the low level of bullish investor sentiment as reported by the American Association of Individual Investors. Bullish sentiment was reported at 22.3% last week and is the lowest level since the 19.2% reading reported at the February 11th market low.

Confirming this broad based bearishness is the CBOE Equity Put/Call ratio reading. The market has a history of making a bottom when the equity put/call ratio is above 1.0 and the current reading of .92 is certainly nearing that level.

Given all of these bearish sentiment readings one might have expected a steeper market pullback during the just completed first week of May. Although market volatility is heightened, the reurn in May is a small decline of .37%. Even given this small decline, other market technicals are indicative of a near term oversold market. As the below chart shows, the stochastic indicator is at an oversold level and the money flow index is also near oversold. Positively, the market found support on Friday at its 50-day moving average.

Market pessimism seems fairly high and one outcome that often occurs is the market likes to prove the consensus wrong. The 'sell in May' strategy was not successful in 2012-2014 as we noted in a post last month. Just maybe the current high level of market skepticism will mark a near term market bottom.

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