As investors headed into the end of December, bullish sentiment was pushing extremes which led me to write a post entitled “Market Bulls Should Consider These Charts” in early January.  A few days later, the markets entered into a two week correction of 6% that sent investors scrambling for the sidelines. Now, four weeks later with the markets hovering near all-time highs, investors anxiously await Janet Yellen’s Congressional testimony to see if she will potentially “taper the taper” due to slate of weaker economic data as of late.
A quick look at investor sentiment (both individuals and professionals) shows a quick return to extreme bullishness following the recent selloff.
While not at the historic high of 3.46 seen just this past December, which should be concerning enough, the current reading of 2.1 is at levels that have historically been consistent with both short and intermediate term market peaks.
Another way to look at this data is by subtracting the bearish sentiment from the bullish to get a “net bullish” sentiment reading. This is shown in the next chart.
Following the historically high reading in December of 40.75, net bullishness fell to a low of 1.32 in January. That “bearishness” has now quickly rebounded to 21.1 as of this past week. Again, as with the first chart, a reading above 20.0 has historically been associated with market tops.
One interesting data point, however, is found in retail investor fund flows. While equity inflows have continued to move into the market, bond flows have also turned positive.
While this would suggest that investors are becoming more cautious on equities at this late juncture, there is no evidence that they are rotating out of risk. Unfortunately, that is generally the case as investors don’t start rotating out of “risk assets” until after a market reversion is already underway.
