Sentiment Says One Group is Wrong.

(Data Source:  AAII and NAAIM; Red –Bearish; Green–Bullish lines are 6-week moving averages not actual AAII data)

The sentiment picture remains mixed.  Interestingly, individual investors  (the avg. Joe) remain skeptical, while institutional investors and Wall Street firms are quite bullish on the outlook judging from the looks of the surveys above.

The U.S. economy seems to be in the midst of an endogenous transition; the baton is being handed from the manufacturing sector to the housing market in terms of a significant source of economic improvement.  Construction growth has perked up; the sector has now become a job creator.  The latest BLS payrolls report showed a hefty job gain in October and the sector’s 5th consecutive positive reading.  Overall, weakness in the manufacturing sector is being replaced with strength in the housing market.

Furthermore China, an important piller for the global economy, is quietly becoming a potential bullish catalyst.  Manufacturing indexes show clear stabilization, while inflation has come down more rapidly. These reports could induce officials to increase their tolerance for additional stimulus to act as insurance for a relatively healthy economy.

From a sentiment standpoint, individual investors have typically been regarded as “dumb money;” therefore market bulls do have a case for further risk taking (higher equities, etc.) if these bullish tailwinds strengthen.

However, the same could be said in a bearish scenario.  To begin, the fiscal cliff has become the largest headwind for investors and economic growth.  Uncertainty has profoundly affected confidence, negatively affecting new orders for core capital goods (a measure of business spending).  Moreover, recent  improvement in the ISM’s survey for the manufacturing and service sectors has masked weakening backlogs.  Demand may not be consistent in the months ahead.  Additionally, small businesses remain pessimistic as per the latest NFIB Small Business Survey.

Perhaps more importantly, Europe has been in the rearview mirror over the past month as U.S. election fever and now fiscal cliff concerns captivate investors.  Political trends in the region remain negative and the risk of a political crisis will likely increase from the looks of the latest round of economic data.

Furthermore, if a slowing global economy begins to affect U.S. economic data, risk markets would likely move lower as investors (institutional) who had hoped that the U.S. could decouple from the rest of the world begin to reverse their bets.  Looking ahead, the decoupling scenario will be put further to the test.

P.S: Various portfolio changes over the past few months.

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