The NAAIM exposure index surpassed its August high last month and has been on either side of its April high over the past two weeks. With price action cooling, active investment managers may regret their eagerness to increase equity exposure.
Last week was the first time in 45 weeks that the weekly AAII survey showed more bulls than bears. The most recent stretch of pessimism did not eclipse the Financial Crisis in terms of intensity (the bull-bear spread bottomed last year at -43%, versus -51% in March 2009). But it did set the record for persistence.
It was funny, there I was telling people it was a new bull market, because we actually do the work around here, but investors weren't buying it.
In fact, we saw 44 consecutive weeks of more bears than bulls among individual investors. This was an even longer streak than we saw during the Financial crisis. Longer than COVID.
People were really angry.
You can see the AAII Bulls and Bears, along with their consecutive streaks plotted below:
Bulls on the Investors Intelligence survey continued to climb while bears fell for the fifth week in a row. The bull-bear spread has now decisively cleared its August high as investors move to embrace the stock market rally.
The January AAII asset allocation survey shows household equity exposure rising for the third month in a row and climbing to its highest level since May.
The Investors Intelligence Bull-Bear Spread was unchanged last week, remaining just beneath the level that in the past has signaled full embrace of equities and the opportunity for sustained stock market strength.
The Investors Intelligence measure of advisory services sentiment shows Bulls rising to their highest level in over a year. Bears have not (yet) undercut their summer lows and the Bull-Bear spread is still just below its August peak.
Over the course of 2022, the two-year (8-quarter) return for the aggregate household portfolio dropped from one of the highest levels in over 40 years to underwater for the first time in over a decade.
Why It Matters: Sentiment soured in 2022 but investors largely stuck with their equity exposure. They choose not to meaningfully increase their exposure to bonds or cash (and commodity funds actually experienced outflows last year). Now investors are reviewing portfolios that didn’t just experience a bad year, but are actually down over the past two years. This is unfamiliar territory for a generation of investors who are not used to sustained weakness and who see US large-cap equities as the only game in town.
One thing I know about this time of the year is that whipsaws thrive.
We call it Whipsaw Hunting Season.
The lack of liquidity, and lack of interest due to other life priorities, creates over-extended and exaggerated moves that otherwise would not be allowed to occur under normal supply and demand conditions.
But since the b-squads are on the desks, you regularly get failed moves this time of the year that result in very fast moves in the opposite direction.
For some great examples see $GDX in December 2016 and check out $TLT in December 2013, among many others.
These were nasty failed moves that ripped the short sellers' faces off into the new year.
We see these sorts of moves born around this time every single season. It's perfectly normal market (human) behavior.
So as we go hunting this year, Tesla really stands out as a potentially great candidate.
Seems like almost everyone has a 2023 earnings estimate for the S&P 500. The thinking seems to be that if you are going to make up a year-end guess at price you should come up with one for earnings as well. That’s not a game I want to play.
