Monday, May 30, 2016

Week In Review (5/23 - 5/27)

If you were expecting a calm trading week heading into the long Memorial Day weekend, you were probably caught just a bit off guard by the S&P 500's 2.3% gain and even more so by the NASDAQ's 3.4% rise.

The market's gains came in the face of continued talk by Federal Reserve officials that a summer interest rate hike is now a real possibility.  The fed funds futures market is now showing that expectations of a June hike have risen from just 8% probability a few weeks ago to 30% now.  More telling perhaps is that the probability of a July hike now sits at 62%, up from 55% a week ago.

With just one trading day left in May, the S&P 500 is up 1.6% for the month and 2.7% year to date.  The NASDAQ, meanwhile, has seen a surge of more than 3.4% in May and now sits down only -1.5% in 2016.

One weekly metric that continues to baffle is the sentiment survey taken by the American Association of Individual Investors (AAII).  The survey, which gauges the direction that individual investors think the market will take over the next six months, is generally regarded as being contrarian in nature.  Meaning, when investor optimism is low it is cited as a potential catalyst for the market to move higher and vice versa.  

Interestingly, recent AAII surveys have been sending some fairly rare signals.  The latest data showed that just 18% of respondents are leaning bullish over the next six months.  This is the lowest level since mid-January and, according to, is even lower than the 18.9% reading that was registered the week of March 5, 2009 (i.e. the market bottom during the 2008-2009 financial crisis). While the survey's bearish reading during that week in 2009 hit an extreme 70.3%, the measure sits at just 29.4% bears today.

So what gives?  Well, it appears that a lot of investors just simply cant make up their minds.  The percentage of respondents with a neutral outlook for the next six months currently stands at 52.9%.  This is far higher than the historical average of 31.2% and, again according to, is the highest neutral measure since April of 1990.  With so many investors sitting on the proverbial fence in terms of near-term market direction, Briefing looked at the history of the AAII survey to find similar instances.  Their comments:

"Looking at the data set from the American Association of Individual Investors, which dates back to 1987, the most analogous period in our judgment to the sentiment readings seen today was the week of September 9, 1988, when bullish sentiment was 17%, neutral sentiment was 52%, and bearish sentiment was 31%. For what it's worth, the S&P 500 was up 4.2% four weeks later.
As an aside, neutral sentiment topped 51% the week of December 31, 2015. That was the first time it has been above 50% since the week of February 7, 2003. The survey for the last week of December also showed bullish sentiment at 25.07% and bearish sentiment at 23.62%. Four weeks later the S&P 500 was down 8.7%.

A lot of individual investors aren't expecting any big move for the market over the next six months, so if the market starts to get away from them, that could force a squeeze play that exacerbates the directional bias of the move."

Nothing actionable there but we like the idea of a "squeeze play" that forces these neutral investors to get involved in one direction or the other (buying or selling).

Have a great week.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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