Our latest sentiment survey was open from 11/19/10 to 11/26/10. We had one more respondent than last survey, with 110 readers participating. Your input is for a good cause! If you believe, as we do, that markets are driven by supply and demand, client behavior is important. We’re not asking what you think of the market—since most of our blog readers are financial advisors, we’re asking instead about the behavior of your clients. Then we’re aggregating responses exclusively for our readership. Your privacy will not be compromised in any way.
After the first 30 or so responses, the established pattern was simply magnified, so we are comfortable about the statistical validity of our sample. Most of the responses were from the U.S., but we also had multiple advisors respond from at least two other countries. Let’s get down to an analysis of the data! Note: You can click on any of the charts to enlarge them.
Question 1. Based on their behavior, are your clients currently more afraid of: a) getting caught in a stock market downdraft, or b) missing a stock market upturn?
Chart 1: Greatest Fear. From survey to survey, the S&P 500 fell around 2%, and client fear levels spiked by a large degree. 86% of clients were afraid of losing money in the market this round, up big from last survey’s reading of 71%. On the other side, we saw the missed opportunity levels fall from 29% to 14%. This is clear evidence that despite a major summer rally (+17% since June lows), market participants are still on edge, ready to jump at first notice. When we see client fear levels go from 71% to 86% on a 2% market drop, that points to overwhelmingly negative, fearful sentiment.
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread remains skewed towards fear of losing money this round. We can see the same move in the spread as we saw in the overall fear levels, as the spread jumped from 41% to 73%. The technical breakout we discussed last survey could not withstand the market pullback.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. Risk appetite levels pulled back *slightly* from their recent highs. Average risk appetite fell from 2.72 to 2.56, and the word “slightly” is important here because of the relative size of the move compared to the basic fear level indicator. Looking at the raw Client Fear levels, we would expect a much larger drop in client risk appetites to go along with the rise in fear levels. We could consider this a divergence pattern, as the risk appetite held up relatively well while the fear levels caved easily on a -2% move.
Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level. This week we saw the same basic pattern as the previous survey, with the majority of respondents looking for risk levels of 2 to 3.
Chart 5: Risk Appetite Bell Curve by Group. The next three charts use cross-sectional data. This chart plots the reported client risk appetite separately for the fear of downdraft and for the fear of missing upturn groups. We would expect that the fear of downdraft group would have a lower risk appetite than the fear of missing upturn group and that is what we see here.
Chart 6: Average Risk Appetite by Group. A plot of the average risk appetite score by group is shown in this chart. Here again, we see more evidence of a muted move in the risk appetite of the respondents, compared to the overall fear levels. We would expect average risk appetite to move dramatically lower, in-line with the general fear levels. However, we see in this chart that client fear levels didn’t fall by that much, and in the case of the missing upturn group, average risk appetite actually moved higher.
Chart 7: Risk Appetite Spread. This is a spread chart constructed from the data in Chart 6, where the average risk appetite of the downdraft group is subtracted from the average risk appetite of the missing upturn group. The spread this week rose by around .10 points this round.
The story of the survey this round would be the massive shift in client sentiment towards the fear of losing money. Right now the S&P 500 is up around 17% from the lows of the summer — that’s a big summer rally. Client fear levels have been inching lower as the rally managed to hold up, but after a -2% pullback, client fear levels have shot right back up. Clearly, market participants are NOT willing to jump into the rally with full faith. The second big story would be the muted move in average risk appetite. Client fear levels and average risk appetite have moved pretty much in-line with each other as expected, but not so on this round. Average risk appetite fell by a much smaller percentage compared with client fear levels — we’d expect to see a major shift towards lowering risk as fear levels grew. However, we saw only a minor shift towards less risk.
No one can predict the future, as we all know, so instead of prognosticating, we will sit back and enjoy the ride. A rigorously tested, systematic investment process provides a great deal of comfort for clients during these types of fearful, highly uncertain market environments. Until next time, good trading and thank you for participating!
