Muted sentiment augurs well for stocks The S&P 500 may be at all-time highs, but the latest Merrill Lynch monthly fund manager survey shows investor sentiment is decidedly muted, with global investors reducing their US holdings to the lowest level in more than seven years.
Ordinary investors share this caution.
The latest American Association of Individual Investors (AAII) survey shows just 25 per cent are bullish, the lowest level in more than two years.
Bullish sentiment has declined in 11 of the last 13 weeks, and has also been below its long-term average for 11 of those weeks.
Investors know US equities, which are pricier than they have been at most past market peaks, look expensive.
They also know the current rally, which this month became the third longest in history, is looking old in the tooth.
However, there are few obvious alternatives, with bonds yielding next to nothing these days, and that has forced reluctant investors into equities.
It's worth remembering that market tops tend to occur when everyone is invested and when investors are gripped with feverish excitement. That's clearly not the case at present, indicating equities may continue to grind higher. Catch-up time for Europe? Merrill's survey reveals sentiment towards Europe remains bullish, even if it has retreated since March's records high.
Regions tend to underperform when bullishness becomes excessively elevated, so European equities may well continue to lag in the short term.
However, history indicates any underperformance is likely to be short-lived, judging by Nautilus Research data. Since 1991, there have been 16 instances where the S&P 500 was trading at 52-week highs at the same time the Euro Stoxx 50 was 5 per cent below its one-year high. Six months later, European stocks were higher on all but two occasions. On average, stocks gained almost 11 per cent, three times the average six-month gain.
The "Europe catch-up trade", as Nautilus dubs it, looks like a good bet. Shanghai and skyscraper curse The Shanghai Tower, the world's second-tallest skyscraper, opened for public previews last week. Next year, an even higher skyscraper will open in Shenzhen.
Barclays' Skyscraper Index suggests investors should be concerned. Skyscraper enthusiasm, says Barclays, can reflect a "widespread misallocation of capital and an impending economic correction".
The world's tallest building opened in Dubai in 2010, when the city was fighting bankruptcy. Malaysia's Petronas Towers, once the world's tallest building, opened just before the 1997 Asian financial crisis. New York's Empire State Building became known as the Empty State Building when it opened in 1931.
It may be a coincidence, of course. In any case, clued-in investors hardly need another excuse to avoid Chinese stocks.
Carnage in China Predicting when a bubble will burst is rarely a good idea; predicting that a bubble will burst, however, is rarely a bad idea, as Chinese investors learned last week.
Shares in solar outfit Hanergy almost halved last Wednesday, wiping nearly $19bn in value off the stock. Hanergy's parabolic rise in recent years had made its chairman, Li Hejun, one of China's richest men, but short sellers and analysts have long been suspicious.
A Financial Times investigation in March highlighted unusual trading patterns in Hanergy, which had risen by more than 1,100 per cent over the previous two years, with most of those gains typically coming in the last 10 minutes of daily trading.
Last Thursday, shares more than halved in Goldin Financial. Again, it was coming: the stock had gained some 350 per cent in 2015, giving it a market capitalisation of more than $30bn.
These are not isolated cases. The tech-heavy ChiNext index has more than doubled in 2015, and trades on more than 100 times earnings. New listings, on average, have risen six-fold. One firm, online video stock Beijing Baofeng Technology, saw its stock enjoy a 40-fold rise since March.
Clearly, further carnage is inevitable.
Profiting from analysis Technical analysis (TA) – the study of price data to guide trading decisions – has never been popular with academics, but a recent study indicates technical traders are a savvy bunch.
The study examined more than 5,000 hedge funds over the 1994-2010 period, comparing the results of those who used TA against those who didn’t.
When investor sentiment is depressed, technical funds slightly underperformed. When sentiment is heady, however, technical traders beat non-users by 5.3 per cent per year, exhibiting “higher performance, lower risk, and superior market-timing ability”.
Markets appear to be more guided by fundamental data during weak periods. During bullish climates, however, price momentum can overwhelm “imprecise” fundamental signals.
Investors are often divided into two camps: fundamental versus technical. The study indicates it’s an artificial divide, and suggests “rotating between technical and fundamental analysis in different sentiment periods.” See http://goo.gl/FA1B4d
