Sentiment: Simply More Buyers Than Sellers

I am re-reading Justin Mamis’ book, The Nature of Risk, a worthwhile read by the way, and being reminded of the dissemination of information prior to the internet age, which is difficult for many to believe if they did not work in investments at that time. Simply gauging market sentiment prior to each day’s market open at that time was much different than it is today, of course. As he notes in his book, when one inquired about, say, a higher market, the most appropriate answer was there simply were “more buyers than sellers” that day. In today’s proliferation of business cable channels, that type of response will not sell many advertisements.

This focus on buyers and sellers is really an evaluation of investor sentiment and is one reason I write about sentiment reports on a fairly regular basis. To that end, the American Association of Individual Investors reported Sentiment Survey results last week and individual investor bullish sentiment jumped 7.1 percentage points to 59.8%. Most of this bullish improvement came from the prior week’s bearish survey participants as bearish sentiment decline 5.1 percentage points to 15.6%. This spike in bullish sentiment can be seen in the below chart.

Also included in the above chart is the less volatile 8-week moving average of the bullish sentiment reading and it remains below an extreme level. Below is a chart comparing the above sentiment chart to the time period in the run up to the technology bubble (bottom half of below chart.) Interestingly, the bullish sentiment is near the same level at the end of 1999 as today’s current reading. However, the 8-week moving average at the end of 1999 was quite a bit higher.

On the institutional side of the sentiment reading equation, the NAAIM Exposure Index has declined to 58%. Certainly not an overly bullish posture being reported by institutional investment managers. The NAAIM Exposure Index consists of a weekly survey of NAAIM member firms who are active money managers and provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesday. Responses are tallied and averaged to provide the average long (or short) position of all NAAIM managers as a group.