Just how bearish are investors?

Recent bearishness resembles levels seen near the bottom of past corrections

The ongoing angst over the global economy has led to a marked souring in market sentiment in recent weeks. Contrarians like to buy when sentiment hits bearish extremes; might this be one of those times?

Yes, says Citigroup, whose widely followed Panic/Euphoria model – a composite of nine different sentiment metrics – currently indicates a 96 per cent probability that stocks will be higher in 12 months' time.

Barclays agrees, pointing to the Investors’ Intelligence survey. Since 2009, current levels of bearishness have “consistently seen the market higher on a six-month view”.

Merrill Lynch points to its bull and bear index, which is at its most bearish level since January 2012, while Bespoke Investment Group notes the huge spike in Google searches for 'market crash'.


Indiscriminate selling has certainly been evident. Last Tuesday, 499 S&P 500 stocks declined, the second-highest reading since 1996. The previous week, a record $29.5 billion was pulled from global equity funds.

However – there is always a “however” – sentiment surveys indicate no sign of panic amongst ordinary “dumb money” investors. Additionally, the aforementioned Investors Intelligence survey is nowhere near the bearish extremes registered during past market panics.

Recent bearishness resembles levels seen near the bottom of past corrections. In a true bear market, however, sentiment can get a lot uglier.

Volatility is here to stay

A fortnight ago, many investors cheered with relief when US indices enjoyed their biggest two-day surge since 2009, prompting StockTake to caution that sharp snapback rallies are a feature of nervy markets rather than an indicator that jitters have eased.

Last week’s action confirmed investors remain edgy, with the Dow tanking 500 points on Tuesday before rebounding the following day.

Volatility had been subdued all year before its recent eruption. Now it's here, it's wise to assume it won't diminish any time soon, as Deutsche Bank noted last week. Analysing seven past spikes in the Vix, or fear index, analysts found that volatility usually remains at heightened levels for several weeks, sometimes months.

There were just two exceptions, with volatility quickly dying down in early 2000 and late 2007.

Even those cases proved to be “prescient indicators of more volatility to come down the road”.

Accordingly, don’t assume the last few weeks are some short-lived “overreaction”. Stocks may well climb in the coming months, but the roller coaster ride looks set to continue for some time yet.

Stocks and September effect

Sell, it’s September!

Yes, we jest, even if it is true that September has easily – and consistently – been the worst month for stocks. According to Bespoke Investment Group, that’s true over both the last 50 and the last 100 years, with September being the only negative month for US stocks.

In five of the last nine decades, it’s been the worst month for stocks, and has never ranked higher than ninth during that time.

Nor is it a US phenomenon, with one researcher finding the September effect to be evident in almost all developed markets.

Thing is, why? All kinds of explanations – tax-related selling, institutional investors returning from their holidays, even seasonal affective disorder – have been proffered, but none seem credible.

September’s dodgy record is likely to be a fluke.

There are many headwinds facing stocks at the moment, but the calendar isn’t one of them.

China to ban lower prices?

The Communist Party is certainly doing its bit for China’s stock market.

The latest brainwave has been to arrest anyone it deems responsible for the recent market crash.

Last week, a financial journalist apologised for causing “panic and fear” and attempting to “create a sensational effect and catch eyeballs”.

A hedge fund manager with the high-profile Man Group is also believed to have been taken into custody.

Previous government efforts have included banning short selling, banning directors from selling shares for six months, allowing traders to pledge their houses as collateral for leveraged bets, setting price targets for the index, buying stocks by the bucketload, and a raft of other desperate measures.

One option remains: put a floor on the index, as Pakistani authorities did in 2008. Following a 40 per cent fall in stocks, they banned prices from going below the 9,144 level “in the interests of investors”. The floor was finally lifted over three months later; within weeks, stocks had halved in price.

Still, it’s worth a shot, right?