Today I wanted to update my top 3 contrarian indicators. The market selloff continues and looking at contrarian indicators can give an investor an edge in determining the right time to buy. I introduced these indicators in this post; money flows; investors sentiment, and margin debt. Lets see what they’re telling us.
First up, money flows. Money continues to pour out of equity mutual funds. The latest data from ICI is below.
The $30B outflow out of equity funds in the week ending Aug 10th was the worst since Q1 2009. On a monthly basis you can see the comparison back to early 2007 in the following chart. This is a monthly chart as of the end of July. Once the Aug data makes it into the chart it will show a further deterioration, at least a $40B outflow for August.
The equity outflows have not reached the lows of late 2008 but they’re sure getting close. This could be a sign of a bottom forming in the equity market but as all indicators it’s not perfect and really needs to be confirmed by other indicators. Now lets look at investor sentiment.
The latest investor sentiment survey from AAII is below. The survey shows an uptick in investor bullishness which is not a sign of a bottom. Ideally you want to see extreme bearishness in the survey to indicate capitulation and a coming turn in the market.
Lastly, lets look at margin debt. Margin debt has started to roll over but is still at very high levels. See below. The problem is that this indicator is very late. The latest data is as of the end of June. Anecdotal data suggests the since the end of June margin calls have picked up significantly. In this Bloomberg article some of the brokers are saying margin debt is now at its lowest level in 2011. That would put it at 250K-275K in the chart below. That’s still above the levels in last summer’s correction.
In summary, these contrarian indicators are not yet signaling capitulation and a bottom in the market. I need to see bearish sentiment go up and for margin debt to come down. So, I guess I’d say the same I said in my last post on these indicators – I’m getting more bullish but the data says sit tight and keep watching. Also, the ultimate confirmation, the price action in the market, is just terrible and has not shown signs of a bottom. Yet. For long term investors there are definitely bargains in the market but the data suggests there may be even better opportunities to come.
Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.