CNN Money’s Fear & Greed Index, which measures sentiment on a scale of zero (extreme fear) to 100 (extreme greed), actually hit zero last week and currently rests at 5:
Source: CNN Money
The historical chart for the index shows last week’s readings were the lowest in two years as investors’ risk appetites evaporated:
Source: CNN Money
Other signs of extreme fear often associated with market bottoms comes from the futures curve for the CBOE Volatility Index (VIX). Typically the futures curve for the VIX has a positive slope meaning 4-month futures values are higher than near- term contracts like 1-month futures. When investors panic they are willing to pay a premium for nearer term contracts and the curve can invert in which near-term contracts are more expensive than longer-dated contracts. This happened last week when the 4-month futures contract was less than the 1-month contract with the biggest spread seen since the mid-summer 2011 lows.
Other signs of selling capitulation come from the National Association of Active Investment Managers (NAAIM) Exposure Index, which represents the average exposure to US equities reported by their members. Heading into 2014 the index was at roughly 100 (fully invested). Now the index stands near 9.97%, which means the average manager is either nearly 100% in cash or hedged or market neutral. The current reading is the lowest figure seen since the mini bear market during the middle of 2011 and exceeds the reading seen at the 2010 market bottom.
For evidence that managers cut their allocation to the stock market one has no further to look than the Powershares QQQ, which indexes to the NASDAQ 100. The ETF’s average daily outflows over the last 20 days were over $366M—the largest average daily outflow seen in more than a decade (middle panel below) and wiped out three years of inflows, which are now back to 2011 levels.
So Bearish It’s Bullish?
The extreme readings we are seeing in sentiment figures and the widespread liquidation of stocks have pushed many measures of market breadth to their worst levels in years. For example, last week we saw the percentage of stocks within the NYSE that are trading above their 200-day moving average reach 30%—a feat not seen since 2011 and one that occurs only every few years.
Whether you are currently bearish or bullish on the market, investors should respect the market’s forward returns when breadth is this bearish. In bull markets, readings at or below 30% serve as major buying opportunities to put fresh capital to work while in bear markets they serve as opportunities to sell into a rally and raise cash further.
Looking ahead, it will be important to watch for tell-tale signs of when the current bull market is losing momentum and ready to enter another bear market. One way to do this is by watching how high the percentage of stocks above their 200-day moving average rises before the next sell off. Looking above we can see that dips near 30% in bull markets quickly reverse and rise well above the 50% mark while in bear markets the 50% level is rarely breached. The last time we dipped below 30% was in 2011 and by early 2012 the number had jumped north of 20% as the bull market carried on.