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  Show Me The (Big) Money

April 27, 2009

 

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This is an abbreviated sample of a comment posted for subscribers

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Good Monday morning...We begin the day with substantial weakness in the pre-market futures, which is being mostly blamed on continued fears of a worldwide flu pandemic, which unfortunately has had tragic consequences for more than 100 individuals.

 

The last time we saw a potential epidemic like this was the SARS outbreak that originated in Asia.  The first reports of that leaked out between late November 2002 and early January 2003, which happened to be as the S&P 500 was testing its prior swing highs following the October 2002 low.  The CDC issued a travel advisory in mid-March 2003 just as we were forming the bear-market low.

 

This has the potential to greatly alter the global economic landscape, which was the same (mostly unfounded) fear we saw in 2003.  Already this morning we're seeing huge moves in the companies that will mostly likely be impacted, so obviously this will remain a focus in the coming days.

 

Such a sudden turn of events could unnerve a number of late-arriving converts to the rally, and from the looks of things there are quite a few of them, both big and small.  In the former camp, Barron's weekly paper unveiled the latest iteration of their Big Money poll, which is always an attention-getter due to the name of the survey and the stature of the publication.

 

Helping to move some papers is the headline "The Long View", a play on words that isn't referencing an extended time frame, but rather a bullish outlook.  Unfortunately, the last two headlines were "The Bulls Are Back" from one year ago when the S&P was trading around 1370 and "A Sunnier Season" when it was at 940.

 

A casual reader of the paper would likely expect that Big Money = Smart Money.  Hopefully, anyone hip on sentiment (and some past studies we've done with this poll) would read it with a more critical eye.

 

Following is a chart of the Big Money's "Bull Ratio", the percentage of respondents who are either bullish or very bullish as a percentage of the total.

 

 

From the chart, we see that these folks have never been net bearish...that should tell us something right there.  To their benefit, at least they were very bullish from the spring of 2003 through the spring of 2004, a pretty good time to be long stocks.

 

On the other hand, they were very negative (well, as negative as they ever get) right before major run-ups in 1999, 2002 and 2005.  And they were unfortunately aggressively bullish throughout 2001 and, worst of all, 2008.

 

Something I find interesting with the chart is that if you look at the blue line (the Bull Ratio), the line is coiling up tighter and tighter as it moves to the right.  That shows us that despite major, major losses, these guys and gals are becoming less and less bearish on each subsequent dip in their optimism.

 

Anyway, does it pay to listen to these folks?  Probably the best way to determine that is to look at the correlation between their predictions and what actually happened.  So let's do that.

 

 

This isn't such a ringing endorsement.  There is absolutely no observable correlation between their forecasts of where the S&P would be six months later, and where it actually ended up.  Not only that, it looks like they're going "on tilt", with the two largest outliers being their two latest forecasts.

 

The poll becomes more granular, asking the approximately 150 managers what sectors and asset classes they like.  Once again, their record here would fit somewhere between mixed and outright horrible.

 

The only consensus figure among the broad sectors was that Utilities would lag, with 0% of managers expecting that sector to lead.  The only other time Utes got a 0% vote was in October 2004 when they subsequently rallied 11% over the next six months.

 

The biggest vote-getter among likely leading sectors was Financials.  The managers turned heavily bearish on this sector in April 2007, became less so by November 2007, and were screamingly bullish on the group by April 2008 (the banking sector subsequently went on to lose about 75% of its value from that point).

 

The only other time these managers were more bullish on any sector than they were on Financials last April were on Technology in November 1999 (not a bad call), May 2000 (a considerably worse call) and November 2007 (another major stinker) and Health Care in October 2005 (that was met with a flat market for the next six months).

 

As for other asset classes, they are majorly bearish on bonds.  It should be noted that they have been bearish almost without fail since 2001 as bonds have enjoyed a secular bull market.  And not only are they bearish now, they have never been more sure of any call (bullish or bearish) - on any sector or asset class - than they are right now with their bearish call on bonds.

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