Abnormal Returns does a nice job of covering the investment commentary waterfront. We should pay special attention to the emphasis today on sentiment. Take a look at the post and check out the sentiment links. Then come back for our views.
Thanks to all of you who are checking out Abnormal Returns for the first time. You can always contact us with feedback. Barry Ritholtz at the Big Picture looks at the nuances of using sentiment data, and how many “proto-contrarians” get it …
Everyone wants to be a contrarian, since it does no good to forecast something that is already "baked in." A lot of the traditional sentiment indicators related to individual investors or newsletters. Some observers, like Doug Kass, emphasize hedge fund long/short commitments.
I think that Doug is closer to capturing the modern era. The individual investor is less important. The mutual fund manager is not getting the inflows of old. The result is that hedge fund managers control more of the marginal dollars. They use leverage with options and some futures, so their size is even larger than recent money flows suggest.
The question is how to measure in this new era of sentiment. What is this "hot money" doing? A small sentiment change could cause a dramatic market move. These guys lust for performance and can shift on a dime.
An obvious gauge of sentiment comes from looking at the market. What are the various indices doing? What has happened to PE multiples? Some observers view this information as superior to the consensus economic predictions. Viewed another way, the hedge fund community may not have any special insight. Their fickle commitments may change rapidly.
Here is an interesting perspective from The Kirk Report, showing only 16% bullish. You should also check out the interview with Laszlo Birinyi from this site. While Kirk himself sees a trading range, he is open-minded in collecting data and viewpoints. You should read the entire interview, but here is a key quote:
Birinyi: The current bull market is the only one in which p/e ratios have actually compressed. Even as oil prices have skyrocketed, companies have shown resiliency and have been able to continue growing earnings at a steady pace. In addition to strong earnings growth, companies have been consistently beating analyst forecasts, and raising their own guidance. Sentiment measures remain negative because of external factors like rate hikes, inflation, oil prices, and the Middle East crisis, but earnings remain strong. This along with positive money flows on the market as a whole makes us remain bullish.
There is a lot of good material at this site, and we thank them for opening up this exclusive interview to the public. One of his key questions was about catalysts. Bullish investors have watched for 30 months as record earnings have led to little increase in stock prices. There has been a continuing cycle of negativity.
This is Birinyi's answer to the source of the catalyst:
Birinyi: No idea. One of my objections to many analysts is that they try to predict events. My view is to understand the environment and if there are dry papers and greasy rags, a fire will develop, but I can't tell you where the match will come from.
We agree in principle, but we think the time is near. Future posts will follow this theme.