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5 months ago
Investor-Sentiment Surveys Indicate Bullishness Is High(June 18, 2001)
Investors have feelings, too, and lately, some analysts fear, they may have been letting those feelings run a little too wild. One of the more arcane stock indicators out there is called investor sentiment -- essentially, how giddy or gloomy investors are feeling.Feelings are just one of many things influencing stock prices, of course. But they do affect people's willingness to invest money, and that means they have a concrete aspect to them. Investors' expectations help determine whether they put money into stocks or hold it out of the market, and that, in turn, can affect demand for stocks. It works like this. When investors are feeling hopeful about stocks, they tend to take money out of cash reserves and put it into the market. The more hopeful they get, the more they then put into stocks and the more stocks rise. It can be a circular process. Eventually, the available cash dwindles, and the bullishness hits its limit. Something happens to make people worry -- bad economic news, perhaps, or a corporate-earnings problem. Then bullishness starts to decline, people take money out of stocks and rebuild cash reserves, and stocks get knocked down. Finally, cash and bearish feelings get to an extreme, the bad news blows over, and the upswing starts again. According to this theory, the best time to buy is when bullishness is just beginning to grow, because that is when money is moving into stocks. The riskiest time to buy is when bullishness is high and just beginning to decline. That's when people are overly optimistic, and money is starting to come out. And that, alas, is the way the market looks to some people right now. A variety of measures of investor sentiment, tracking the feelings and actions of individual investors, professional money managers, newsletter writers, Wall Street stock strategists, futures traders, options traders and others, show bullishness at high levels right now. In most cases, the bullishness has just begun turning down from a high. The surveys "suggest that people are way too bullish, and that people will have to get a lot more bearish before stocks go much higher," says Jason Trennert, an economist at the New York market-analysis firm International Strategy & Investment, which has been surveying 50 professional money-management firms since 1994. ISI's survey shows investors recently have been at a far-higher level of bullishness than at any time since the survey began, which is worrisome since it is hard to imagine the optimism going much higher.The market certainly has been showing signs of fatigue lately. Amid growing nervousness about the prospects for corporate earnings, the Dow Jones Industrial Average fell 3.22%, or 353.36 points, last week, to 10623.64, including a drop of 0.62%, or 66.49 points, on Friday. The Nasdaq Composite Index, which had been leading the recent gains, suffered its worst one-week percentage decline of the year, falling 8.43%, or 186.67 points, to finish the week at 2028.43. The Nasdaq slide left the index down 12% since its recent high on May 22, although it is still up 24% since April 4. The broad Standard & Poor's 500-stock index fell 4%, or 50.6 points, for the week to 1214.36. Some analysts see current market sentiment as a decidedly negative factor. In this view, too many people haven't understood how weak the once-beloved technology stocks are. As those people become disgruntled, they will sell, driving the stocks, and the overall market, down to new lows, the skeptics say. But the prevalent view is that the current exuberance may just put a limit on the market's ability to gain, rather than pushing stocks to new lows. Ned Davis Research in Venice, Fla., has created a composite sentiment indicator based on a wide variety of other sentiment indicators, involving individual investors, mutual-fund investors, investment advisers and options and futures traders. Ned Davis's measure, dubbed the Crowd Sentiment Poll, got to a level of 67.1% bullish on May 22, the day the Nasdaq hit its recent high. It has been slipping since then. Because other market factors are more positive, the firm sees that as a sign of a pause in the recent gains, rather than a new bear market. "It is consistent with a pullback in an ongoing uptrend," says Tim Hayes, Ned Davis's global stock strategist. One of the more-offbeat sentiment indicators is a survey done by Richard Bernstein, chief quantitative strategist at Merrill Lynch, who tracks the recommendations of 15 prominent Wall Street investment strategists. As of late May, the strategists were recommending that clients keep an average of about 69.6% of their funds in stocks, the highest level since 1985, when the data began to be compiled. "We keep having to redraw the chart because it keeps going up," Mr. Bernstein says. The extreme bullishness probably bodes ill for stocks, he adds, since it isn't likely to go much higher. Mr. Bernstein acknowledges that he raised his own recommended stock holding in April, although only to 60%. He thinks the overall market isn't likely to fall back to April lows, although he thinks technology stocks will. But some analysts think sentiment and money-flow data remain bullish. Jeff Rubin, research director at Birinyi Associates, says he has for years compiled anecdotal evidence of investor sentiment from media reports. His recent readings tell him that investors still are nervous about the market, far from the exuberant bullishness that was prevalent early last year. Birinyi Associates also tracks money moving into and out of stocks, and finds reason for optimism. Birinyi sees signs that on days when stocks have declined in recent weeks, some professional investors have continued to move in and gradually accumulate positions on the lows. That, Mr. Rubin thinks, puts a limit on declines and indicates that stocks could be poised to recover. Some analysts try to track actual cash levels, to determine not just what people feel but what they are doing about it. That is harder to do, since people put money into money-market funds for many reasons, not just to park it before they put it into stocks. According to Ned Davis, cash holdings now make up 21% of total household financial assets, up from a low of about 18% early last year. That rise no doubt came partly because people held money out of the stock market, but also no doubt because the value of people's stock holdings has fallen since early 2000, while the value of a dollar hasn't. Ned Davis notes that the average cash holding since 1952 is just under 29%, meaning that people still have less money than usual in cash. Every week, ISI asks 50 money managers how much of their available cash reserves they have in stocks -- as opposed to holding it on the sidelines in cash. Most stock portfolio managers are required to keep most of their money invested in stocks; the question is what they do with the 5% to 10% of assets they are allowed to keep in cash. As of June 12, they had 65% of that available cash invested in stocks, a high level. That left them relatively little still to move into the market.
