#2: DERIVATIVES POSITIONING

With the S&P 500 making new highs, we are seeing a significant change in overall investor sentiment. As we noted in our Weekly Market Commentary from late January 2016, “Any Bulls Left?”, many sentiment polls and indicators had been flashing extreme fear consistent with major lows. Now after more than a 20% rally from those February 2016 lows, sentiment is beginning to turn much more optimistic, potentially a warning sign.

Recently, positioning in the derivatives markets has become much more bullish, according to data from the Chicago Board Options Exchange (CBOE). In fact, last week, the 21-day moving average of bearish equity derivatives relative to bullish equity derivatives was the most bullish this group has been in over a year. From a contrarian point of view, this many bulls showing up at new highs could be meaningful.

#3: SENTIMENT POLLS ARE MUCH MORE BULLISH

Active money managers are the most exposed to U.S. equities they have been since November 2013. In fact, the National Association of Active Investment Managers (NAAIM) Exposure Index jumped above 100 last week for only the fifth time in the 10 year existence of the weekly survey. For reference, this survey was 22 in early February 2016 [Figure 2].

Not surprisingly, the other moves above 100 happened with the S&P 500 near all-time highs. The good news is the S&P 500 has been higher six months later all five times with an average return of 7.9%, so this doesn’t appear to be a major contrarian warning.

Adding to the bullish sentiment backdrop, the Investors Intelligence U.S. Advisors’ Sentiment Report has 54% bulls, the most since May 2015—although it isn’t quite at the historically worrisome level of 60%. Lastly, the Citigroup Panic/Euphoria Model is at its highest level in a year, again suggesting more positive sentiment for equities. The good news is this still isn’t near “euphoric” levels, but it is still high relative to recent readings. 


#4: HUGE INFLOWS INTO THE SPDR S&P 500 ETF Trust

Looking at Bloomberg data, we’ve noted before the huge outflows from equity mutual funds and that trend continues with no end in sight. The majority of those funds have found their way either to bond mutual funds or exchange-traded funds (ETF), or stock ETFs. But the S&P 500 making seven new highs last month has sparked a huge surge back into the SPDR S&P 500 ETF Trust (SPY). For the month of July 2016, this ETF saw inflows of $13.3 billion, the third most since 2011, and the most since $17.8 billion in December 2014 [Figure 3].

Is this a “late to the party” surge, or could it just be the beginning of money moving out of bond funds and ETFs and into stock funds and ETFs? We’ll call it more a near-term worry than anything, as flows into equity funds and ETFs are still nowhere near past major peaks. But the sudden surge does add to the potential for a near-term shake out.