Are Traders More Bearish Today Than in 2007?
Quick Summary
- It's trendy to say that everyone's bullish.
- But the evidence shows that many investors don't trust the market.
- A lot of investors left the market altogether!
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Permabulls always say everyone’s bearish.
And permabears always say everyone’s bullish.
That's how I open T3 Live's Weekly Sentiment Reports.
And it's very rare that the “permas” back up their opinions with real data.
So I do my best to supply you with numbers that can help us figure out how the crowd's actually feeling.
Obviously, traders want to know if this is the year the market tops out.
So they'll look for parallels to 2007, when the market peaked ahead of the financial crisis.
I'm obsessed with sentiment data, so we're going to take a deep dive into the numbers to figure out:
- How bullish traders were at the 2007 SPX top, and how that compares to the present
- Major warning signs ahead of the 2007 market peak, and whether we're seeing them again today
Background on 2007
Before the financial crisis hit, the SPX hit a record high of 1576.09 on October 11, 2007.
That put the index was up 11% on the year, excluding dividends.
Now, people had been debating the health of housing for years.
Former Fed chairs Ben Bernanke and Alan Greenspan weren't worried about a bubble.
But Forbes Magazine actually asked the question ‘What If Housing Crashed?' back in 2001.
And in 2005, Berkshire Hathaway's Warren Buffett and Charles Munger warned about some areas of housing getting bubbly.
How Did Traders Feel in 2007?
Traders were very complacent at the October 2007 top.
The housing bubble was a subject of constant debate by then, but individual investors as a whole weren't concerned.
They thought we could survive the storm.
On October 11, 2007, the American Association of Individual Investors survey indicated that 54.6% of investors were bullish — well above the long-term 38.3% average.
That was the highest level since January 17, 2007.
The 8-week moving average (a good estimate of the trend) was 44.4%.
The average year-to-date at that point was 42.4%.
Now let's see how that compares to readings from last week, just ahead of Monday's new all-time highs in the SPX and Nasdaq.
Last week, just 32.3% of investors were bullish, with an 8-week moving average of just 32.5%.
Year-to-date in 2017, the average is just 33.6%.
So by this measure, individual investors are not nearly as bullish as they were in 2007.
Here's a chart so you can see the difference between 2007 and today:
Clearly, individual investors are nowhere near as confident as they were in 2007.
What About Options Traders?
I then took a look at the CBOE equity put-call ratio.
The long-term average of 0.655 hasn't changed much since October 1, 2006, which is when my data set begins.
So this is a very stable indicator to use.
Around the October 11, 2017, however, there was a bit of a lull.
On October 15, the 10-day moving average fell to just 0.568, a 3-month low.
In 2017, we have not had a single 10-day moving average that low.
The last such reading was on December 19, 2016.
This isn't as clear-cut a comparison as the AAII example, but it points to less complacency today.
The Gallup Poll
A recent Gallup poll showed that just 54% of US adults have owned stocks during the 2009-2017 bull market.
But from 2001 – 2008, 62% of adults owned stocks.
In fact, the only group of Americans that have maintained stock ownership has been those earning over $100,000 per year.
Many of the masses have left.
Conclusion
It's trendy to say that everyone's bullish.
But the evidence shows that many investors don't trust the market.
In fact, the Gallup data indicates that a lot of folks just got up from the table altogether.
This is good news for the bulls.
Why?
Because tops tend to happen when everyone's in.
This bull may have some more room to run…