Advertise Here
Icon

Directory

IconActuaries
IconAdministration Outsourcing
IconAsset Managers
IconAssociations & Institutes
IconAuditors
IconBanking
IconBBBEE Consulting and Verification Agencies
IconBusiness Chambers
IconBusiness Process Management
IconCompliance
IconConsumer Protection
IconCorporate Governance
IconCredit Bureaus
IconCurrencies
IconDebit Order Collection Facilities
IconEducation and Training
IconFAIS
IconHuman Resources
IconInformation Technology and Software Partners
IconInvestment Consulting
IconInvestment Fund Managers
IconLegal
IconLISPs
IconListed Equities
IconOmbud
IconParticipation Bond Managers
IconPolicy Trading
IconProperty Unit Trusts (PUTS)
IconPublications
IconRegulatory Authorities
IconStock Exchange
IconSurveys and Research
IconTraining Courses & Workshops
IconUnit Trust Fund Managers
IconWellness Programs
Advertise Here
  Subscribe To »

Investors should proceed with caution

Published

2012

Thu

23

Feb

To say that investors have been content with where markets have been heading over the past few weeks is an understatement, says Paul Stewart, managing director of the Plexus Group.

 

“Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), has fallen by 60% since October 2011 and 20% since the start of 2012,” says Stewart. “Volatility has fast been approaching historically low levels not seen since before the credit crisis began, as previously sidelined cash has been working itself into the markets and has resulted in a strong rally over the first six weeks of the year.”

 

“Looking at history it is important to note that when volatility subsides to historically low levels, like we've seen recently, it tends to generate its own reversal,” says Stewart. “This is based on the old contrarian principle that the crowd can't be on the right side of the market's trend for long. However, it should also be noted that the saying that retail investors ‘can't be right for too long’ can often be misleading,” he warns.

 

“We aren't justified in assuming that because contentment is high and volatility is low the intermediate-term uptrend for stocks is doomed. There is still a strong current of internal momentum behind this market, which argues against a major interim peak happening right now. However, it is important to take cognisance of some of the factors out there that point in the opposite direction, at least in the near term.”

 

According to Stewart, many big, technically oriented market participants have already been anticipating increases in volatility. “The market for options on the VIX itself has shown this trend quite clearly of late, with option traders ramping up the number of bets that would profit should the CBOE Volatility Index rise from its seven-month lows.”

 

Current sentiment survey readings have also been suggesting that markets are becoming increasingly overbought. “Investor sentiment, which was dismal towards the end of 2011, has begun to reverse and quite rapidly at that,” Stewart points out. The latest sentiment data, indicate almost alarming degrees of optimism and bullish sentiment.

 

“When the majority of investors have been bullish for some time, we can assume they are reaching levels close to full market participation,” says Stewart. “Once everyone who is going to buy has bought, stocks can be vulnerable to downside corrections. In one of the most recent surveys by the American Association of Individual Investors (AAII), individual investors show the highest levels of bullish optimism since the period leading up to the peak in April 2011, with a ratio of 2,5 to 1 bulls to bears.”

 

According to Stewart, US financial advisers are equally bullish. The latest survey by the Investors Intelligence Advisors Sentiment shows a ratio of 2 to 1, the highest in the past 12 months, while the National Association of Active Investment Managers’ bulls are at their highest level in 13 months.

 

Over the past several weeks, short interest on the two major US stock exchanges, the NYSE and the NASDAQ, has also been falling. “The past two weeks alone have seen overall short interest fall by over 5%,” says Stewart. Short interest simply measures the overall exposure short sellers (investors who sell stocks and ETFs short, essentially borrowing shares with the intention of buying them back at a lower price to profit) have to individual securities.

 

“One may think that this would appear bullish, as fewer investors/traders are willing to bet on profits from the downside, but just like investor sentiment it has often proven to be counter-intuitive,” explains Stewart.

 

Insider selling has also been accelerating quite rapidly. “While insider selling is normally seen as fairly routine and somewhat random, the rate at which this has been happening of late is neither of these,” says Stewart. “In the month of February alone, as the S&P 500 cleared the 1 320 level, cumulative corporate insiders have unloaded over $2,3 billion in stock while insider buying in that same period totalled only $150 million, amounting to over 15 to 1 sellers to buyers.  The acceleration and ratios are similar to those in July 2011, just before one of the harshest two-week periods in the stock market in years.”

 

The most recent Bank of America Merrill Lynch fund managers survey also saw risk appetite increase rather substantially. According to the survey, global managers upped their weightings to emerging markets from a net 20% overweight in January to a net 44% overweight, which represents the second biggest jump in the past 12 years, following an improvement in expectations for the global economy in the coming year. According to Gary Baker, the head of European equities strategy at BofA ML Global Research, historically such a large shift in sentiment ­towards emerging markets can be seen as a contrarian trade, with the argument that the sector has got too far ahead of itself.

 

“Thus far markets have been resilient despite all the headline risk remaining in play,” says Stewart. “With Greece becoming more and more in danger of facing a disorderly default despite the second bailout deal, which could lead to a financial shock throughout the banking system, and concerns regarding the eurozone’s growth, the market has been taking things surprisingly in its stride,” says Stewart.

 

“The market is due for a period of consolidation,” says Stewart. “While this could materialise as a mere pause before a resumption of the bullish rally, odds still point to some form of a short-term correction before any significant move higher. Therefore, if your portfolio has moved to an overweight equity position due to the strong rise in prices, this may be a good time to trim back your risk to neutral and bank some of your profits.”

 
Source: Cadiz Street Communications
 
« Back to previous page Print this page » |
 

Breaking News »

Indonesia’s President Jokowi: ‘We Have to Reinvent Our Economies, Our Societies”

Jakarta, Indonesia: The growing competitiveness and volatility in the world economy, including the rise and fall of currencies and the drop in commodity prices, and the shift of the global economic centre to Asia ...
Read More »

  

The Momentum / UNISA Household Wealth Index 4th Quarter 2014

Stagnant Wealth Accumulation in 2014 - a Cause for Concern for South Africans South African households were dealt a hefty blow in 2014 as the value of their real net wealth virtually stagnated compared to 2013 ...
Read More »

  

CEOs in the financial services sector are more optimistic about their growth prospects

Worldwide CEOs in the banking and capital markets sectors are optimistic about their growth prospects over the next three years, despite growing concerns over global economic growth. Although CEOs share ...
Read More »

  

China: Record Fall in Property Prices Despite Monetary Easing

By Charlie Carre at Coface, the international credit insurer’s economic & research department in France Despite monetary easing, the housing market in China continued to weaken in February 2015. The ...
Read More »

 

More News »

Image

Healthcare »

Image

Life »

Image

Retirement »

Image

Short-term »

Advertise Here
Image
Image
Image
Image
Advertise Here

From The Glossary »

Icon

Rand Hedging:

Rand hedging is another very good reason for investing offshore. Over the past few years the South African currency has shown landslide depreciation compared to the major currencies of the world, e. g. the British Pound and die US Dollar. By investing some of your money in these currencies you would have benefited from this decline in the value of the rand.
More Definitions »

 
 
By using this website you agree to the Terms of Use.
Copyright © Stoker Risk & ICT (Pty) Ltd 2004 - 2015.
All Rights Reserved.
Icon

Advertise

  Icon

eZine

  Icon

Contact IG

Icon

Media Pack

  Icon

RSS Feeds