A seven-year advance in which the S&P 500 rallied about 220 percent qualifies as the second-longest bull market ever, and it may not be surprising that investors are increasingly at odds. For bears, elevated valuations and falling profits are sounding the rally’s death knell, while evidence of improving economic growth and central-bank rescues have renewed faith among those who lived though two corrections in six months.
Ironically, a byproduct of the polarization has been the extraordinary calm for the major averages. The S&P 500 has been locked in a 1.5 percent range over the past 30 days, the smallest fluctuation since 1965. Prices of options to hedge against equity swings, almost entirely a function of volatility in the indexes, are plunging. At an average of 12.29, the VIX is trading lower than any August since 1994.
‘Middling Sentiment’
“We’re not seeing a one-sided trade,” Jim Paulsen, chief investment strategist at Wells Capital Management, which manages about $350 billion, said by phone. “The market action as a whole reflects, at best, middling sentiment. I can certainly see how people are that way, based on seasonals and the uncertainty from the Fed.”
The skepticism of individuals is also evident in money flows. Since December, almost $90 billion has been withdrawn from mutual and exchange-traded funds, according to data compiled by Investment Company Institute and Bloomberg. That exceeds outflows from all but one year at this point of time in data going back to 1984.
“If you stayed invested for the last few years and you have a lot of money invested, from that perspective it’s perfectly normal for retail investors to take their money off the table,” said Ram Gandikota, who helps oversee $1.5 billion as senior portfolio manager at Ativo Capital Management LLC in Chicago. “But to completely take your gains out and then go toward a short position on the market and have a negative view, it’s probably too soon.”
Giving Up
Institutions have largely given up on bearish positions. According to a Bank of America Corp. survey, money mangers owned more U.S. equities than are represented in benchmark indexes in July and August, after holding an underweight position for 16 straight months. They also scooped up shares that benefit most from an economic recovery, with cyclical holdings climbing to the highest level since 2012 relative to defensive ones, the firm said.
That last time retail and professional investors disagreed on the VIX’s direction, it was the little guys who proved right. During the first half of 2015, hedge funds sold out of equity insurance while retail investors turned cautious. Then in August, the VIX saw its biggest two-day spike on record.
To Terry Morris, a senior equity manager who helps oversee about $3.2 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., the lack of consensus is one reason why the bull market will keep going because bears will be lured back by higher prices.