For the past two months the U.S. stocks have been acting like penny stocks; volatile is a meek term compared to what we have experienced. Down and up.  And all the while, investors become more and more nervous.  Given this recent experience, I thought I’d share the latest sentiment numbers to give us some perspective in how professional and individual investors feel about investing in stocks.

Sentiment numbers have fallen considerably in recent months.  The Ned Davis Research crowd sentiment is 48.5% – all the way down from 72% not that far back.  For the record, anything below 55% means investors are becoming pessimistic about the market.

The real story is that “Active” professionals are allocating only 25% to stocks.  As recent as this last Spring, they were fully invested, 100%.  They’ve fled for now anyway.  Some might see this as a bullish sign because when sentiment falls, it’s a contrary indicator to get back into the market.  But, individual investors are still 65% allocated to stocks – which is currently much higher than the professionals. There’s a lot to be said regarding this bullishness so don’t think for a second that the market has bottomed.

For the moment, the risks remain. U.S. equities are still among the most overvalued when accounting for earnings over the last 10 years. And relative to revenue, the S&P 500 still trades at 1.8x, which is outrageously high.  Just so you know, that’s not a level where long-term bottoms are made.  The other risk is earnings growth for the rest of 2015. The third quarter is coming to an end and earnings reports will start to come out in about a month.

I’m skeptical, as you may have guessed.  Anyone who has followed the All-Climate Portfolio knows investing in to “inverse” positions has made our biggest gains.  And thankfully so, given that the S&P500 is presently at the same level it was in July of 2014.

So we will take those reported earnings with some skepticism and caution.  Regardless, the All-Climate Portfolio strategy is to remain market neutral… meaning; it does not depend on an up market to be profitable.  Given the times we are in and expect to see for the foreseeable future, I can’t think of a better place to be; cautious, and ready to be on either side of the fence or in cash.

As always, please contact us with any questions.

Greg Franklin


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