Streaks, Observations and Notes
Thursday, June 6, 2013
Charles Rotblut, CFA
AAII Journal Editor

AAII Resources

Money Funds and the Regulators
Insights into the push to change how these funds are regulated.

Four Fundamental Tests
Useful indicators to evaluate the attractiveness of a stock.

Interest Rates and Bond Prices
How changes in rates impact bond prices.

AAII Discussion Boards
What measures do you use to assess the market’s valuation?

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 29.5%, down 6.5 points
  Neutral: 31.6%, down 2.8 points
  Bearish: 38.9%, up 9.3 points

Long-term averages:
  Bullish: 39.0%
  Neutral: 30.5%
  Bearish: 30.5%

Take the AAII Sentiment Survey »




I have a few observations and notes to share with you this week. None long enough to warrant their own weekly update, but still worthy of mention.

The first is the streak of winning Tuesdays. Until two days ago, the Dow Jones industrial average rose on 20 consecutive Tuesdays. According to Bespoke Investment Group, this was the longest such streak since at least 1900. It may be the longest such streak ever.

The streak was obviously a random event. I did not hear of anybody, professional or individual, who was making decisions based on it. But, it is human nature to find identifiable patterns in what is otherwise a series of random events. Combine this behavior with the temptation to expect current events to continue into the future and a recipe for disaster is formed. Streaks do occur (e.g., a roulette ball landing on black several times in a row), but that does not make them repeatable events.

Another streak that appears to be ending, or at least weakening, is the year’s upward run by traditionally higher dividend-paying stocks. Many utility, telecom and even consumer staple stocks, plus REITs and MLPs, lagged in May on fears about rising interest rates. Junk bonds fell too. You can call up a chart on many such stocks and see a decline in prices starting on May 21 or May 22.

Behind the move is an increase in bond yields. Yields on the benchmark 10-year Treasury have risen above 2.1% on concerns the Federal Reserve will either cut back or end its bond purchases. Not mentioned in any of the commentary about the recent increase in rates is that nearly every prediction about when the Federal Reserve will reverse course on its monetary stimulus and raise its target rate has been wrong. There is also little mention that current yields are still very low. Relative to a month or two ago they may seem high, but that’s only because so many people have anchored the expectations for where the benchmark Treasury note should trade at around 1.6% or 1.7%.

Also potentially contributing to the recent pause in the stock’s market rally are prevailing valuations. My colleagues and I are having more difficulty finding good quality stocks with valuations below their historical averages. It’s not that stocks are expensive, but rather that an increasing number look to be fairly valued.

It’s not just large- and mid-cap stocks either. The Stock Investor Pro Shadow Stock Portfolio screen (*IISSP) only identified 10 stocks this week, a low number. This implies that there are comparatively few bargains among small companies. Again, it doesn’t mean stocks are expensive, only that they aren’t cheap anymore.

This is something those of you who are thirsty for yields should consider: The current yield of the S&P 500 index is 2.26% (more than 80% of its members now pay dividends) and the broader Russell 3,000 index yields 2.02%. Any dividend yield above 3.5% should raise questions about why it is so comparatively high. A comparatively high yield is a sign of perceived risks; investors are demanding extra compensation. Though some attractive high-yielding stocks may be out there, tread carefully.

Speaking of yields, the Securities and Exchange Commission voted unanimously yesterday to propose two money market reform rules. The first would require prime money market funds to transact at floating net asset value. Share prices would be priced out to four decimal points. Government and retail money market funds (defined as limiting shareholder redemptions to a maximum of $1 million in transactions per business day) would be exempt. The second would set in place liquidity fees during times of stress. Details on both proposals can be found on the SEC’s website.


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The Week Ahead

Just two S&P 500 member companies will report earnings next week, H&R Block (HRB) and PVH Corp. (PVH). Both will announce their quarterly results on Wednesday.

The economic calendar is also light. May import and export prices and April business inventories will be released on Thursday. Friday will feature the May Producer Price Index, May industrial production and capacity utilization and the preliminary June University of Michigan consumer sentiment survey.

The Treasury Department will auction $32 billion of three-year notes on Tuesday, $21 billion of 10-year notes on Wednesday and $13 billion of 30-year notes on Thursday.

AAII Sentiment Survey

Individual investor’s short-term outlook for stocks remains volatile, as is evident by the latest AAII Sentiment Survey. Bullish sentiment fell 6.5 percentage points and bearish sentiment rose 9.3 percentage points.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 6.5 percentage points to 29.5%. This is a six-week low. It is also the 12th time in the past 15 weeks that optimism is below its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, pulled back by 2.8 percentage points to 31.6%. Even with the decrease, neutral sentiment stayed above its historical average of 30.5% for the sixth time in seven weeks and the eighth in the past 11 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, surged 9.3 percentage points to 38.9%. This is the highest level of pessimism registered by our survey in seven weeks. It is also the first time in five weeks that bearish sentiment is above its historical average of 30.5%

Individual investor sentiment remains highly volatile. Bullish sentiment is down 19.5 percentage points from two weeks ago and bearish sentiment is up 17.3 points over the same period. Since the start of March, bullish sentiment has fluctuated within a 26.1-point range and bearish sentiment has fluctuated within a 32.9-point range.

The recent speculation about whether the Federal Reserve will reduce its bond purchases sooner rather than later has added to the mixed opinions AAII members have about the short-term direction of stock prices. While individual investors have been encouraged by the length of the current rally, the first quarter’s better-than-expected earnings and signs of continued economic growth, they have also been discouraged by prevailing valuations, the actual pace of economic growth and a lack of progress on key issues by the White House and Congress.

This week’s special question asked AAII members for their perceptions on the housing market. More than 60% of respondents said the housing market was either improving or that the recovery is sustainable. Several described the recovery as gradual or slow, however. Approximately 20% of respondents view housing as either being propped up by low interest rates or susceptible to a slowdown when rates rise. A small percentage (9%) do not believe a housing recovery is actually underway.

Here is a sampling of the responses:

  • “My perception is that pent up demand coupled with historically low interest rates and a recovering economy are facilitating the ascent in the housing market.”
  • “There seems to be upward movement in housing prices, but with considerable variability within and across markets.”
  • “Hopeful, but cautious moving forward. The turnaround is coming from a historic low point in the market.”
  • “Sooner or later, the Fed will have to increase interest rates and that will dampen the recovery.”
  • “Prices are rising too fast due to low interest rates. Buyers are overpaying, making way for another bubble.”

» Take the sentiment survey