Systematic Relative Strength

Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll. We’re also featuring a Dorsey, Wright Polo Shirt Giveaway for the next few months. Participate to learn more.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions! Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients. It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good! It’s painless, we promise.

Our latest sentiment survey was open from 2/11/11 to 2/18/11. We had a drop off in responses, down to 74 participants. Unacceptable! 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.

Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions! Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients. It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good! It’s painless, we promise.

Our latest sentiment survey was open from 1/28/11 to 2/4/11. We had a nice boost in responses, with 93 participants. 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.

Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions! Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients. It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good! It’s painless, we promise.

Our latest sentiment survey (and first of the year) was open from 1/14/11 to 1/21/11. We had a slight drop off in advisor respones, with 83 participants. 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.

Here we have the next round (and first of 2011!) of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions! Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients. It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good! It’s painless, we promise.

Our latest sentiment survey was open from 12/31/10 to 1/7/11. We had a decent holiday bounce for participants, with 91 responses. Things will surely pick up once the new year gets rolling. 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.

Our latest sentiment survey was open from 12/17/10 to 12/24/10. The survey continues to experience a “holiday malaise,” with only 72 particpants responding. Things will surely pick up once the new year gets rolling. 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.

Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions! Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients. It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good! It’s painless, we promise.

Our latest sentiment survey was open from 12/3/10 to 12/10/10. We had a holiday drop-off in respondents this round, with 84 people 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.

This gem is from an article by Peter Cohan over at Daily Finance. The complete piece is about how all of the pundits have been completely wrong about the market rally this year, a topic that is also the subject of a Bloomberg piece today. (Ignoring pundits is a practice that has been heavily reinforced here at Systematic Relative Strength!) Cohan has one of the most concise demolitions of the typical market story in the media:

The media has gotten into the habit of delivering reports on daily developments in the global economy, and suggesting that those events somehow cause changes in stock prices, and nobody challenges that flawed logic.

Exactly.

Bearish stories are particularly good at keeping investors out of rising markets. Reading either one of the linked stories should make it clear that it is quite possible to have lousy news and a good market.

Source: www.clipartguide.com

Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions! Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients. It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good! It’s painless, we promise.

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!

Bill Miller of Legg Mason Capital Management, in his November 2010 issue of Perspectives, discusses the market situation. I think he correctly points out that economic conditions are pretty good, but what is really lacking is confidence and optimism. Pessimism has infected the masses-and people are always more comfortable doing what is being done by the crowd. The crowd is driven by emotions, and emotions are driven by price action.

One of the most remarkable things about the investing world is how (correctly) venerated Warren Buffett is and how completely people ignore his investing advice. Since Mr. Buffett has made more money than anyone in the history of the planet solely through investing, one would think that when he says quite clearly what to invest in, people would pay attention. I guess they do pay attention, they just do the opposite. In 1974, near the bottom of the market, he said stocks were so cheap he felt like an over-sexed guy in a harem. In 1999, near the top, he opined that stocks would see returns way below those experienced in the bull market up to that time. From the time of his comments in November 1999 to the end of October 2008, stocks fell over 2% per year. In October 2008, again near the bottom, Buffett published an op-ed in The New York Times entitled, “Buy American. I Am.” telling people to buy American stocks. They promptly accelerated their selling. On October 5th of this year, he said the following: “It is quite clear stocks are cheaper than bonds. I can’t imagine anybody having bonds in their portfolio when they can own equities.” The result: people pour their money into bond funds in record amounts, and sell their holdings in funds that invest in U.S. stocks. Why investors persist in doing the opposite of what the greatest investor of all time does, is a greater mystery than the problem of consciousness, or the origin of life, or free will and determinism. Those at least are hard problems.

What will bring the public back to stocks? The same thing that always does: higher prices. People like bonds not because they have carefully considered the risks and rewards of owning them, but because they have gone up so much over the past several decades. Stocks are the long duration asset, and their level reflects people’s optimism about the future and their attitude toward risk.

The bold is my emphasis, I suppose because I find his commentary accurate, funny, and sad, all at the same time. Investors have memories and the freshest memory right now is the beating the stock market took in 2008-2009. Investors want nothing to do with stocks right now, even though some return factors have performed pretty well this year. [As an aside, investors are generally stunned to learn that the PowerShares DWA Technical Leaders Index is up more than 20% year-to-date. It's just not in their mental framework that things could be going well.] Will they ever come back to equities? Of course-when they feel comfortable. Unfortunately, they will likely miss a great deal of the recovery by relying on their emotions.

Going against the crowd is difficult for people. Maybe we just need to figure out a way to form a new crowd that is more productive for investors. Perhaps snazzy banners saying “100% of successful investors go against the crowd. Join us!” would do the trick. Clearly, I will never be a slogan writer, but you get the idea.

Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions! Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients. It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good! It’s painless, we promise.

Our latest sentiment survey was open from 11/5/10 to 11/12/10. We had a few more respondents than last survey, with 107 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 market rallied over 3%, and client fear levels dropped in kind. Only 71% of clients were afraid of losing money in the market, versus last survey’s reading of 81%. On the flip side, 29% of clients are now afraid of actually missing out on the rally. In late August, 94% of clients were afraid of losing money in the market. It took a 15% market rally to move fear levels to their current reading at 71%.

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, but significantly closer to par. Right now the spread is sitting at 42%, the furthest towards 0% we’ve seen since April of 2010. We would consider this recent move a significant technical breakout.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

Chart 3: Average Risk Appetite. Risk appetite levels continued higher in their breakout, but not to the same degree as client fear levels. This survey round, risk appetite came in 2.72, up just a little over last survey’s 2.62. Considering that client fear levels fell by such a large degree, it seems like this move is a bit more muted than we’d expect. Average risk appetite is still around its 6-month highs.

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 a continuation from last survey’s shift to more risk. We had a smattering of 5′s this round, whereas in the past few months we were lucky to see even one.

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. This chart highlights one of the more nuanced stories of this round of surveys — that average risk appetite has not moved as strongly as client fear levels. In a rally market, we’d expect to see shifts in fear levels to move lower, and risk appetites to move higher. And while this did happen, the fear of missing an upturn group dropped the ball. The upturn group’s risk appetite actually fell this round, to 3.1 from 3.2, possibly suggesting concern that the rally is near the end. The downturn group performed as expected, as their average risk appetite was slightly higher.

We’ve noted before that the upturn group has a much more volatile risk appetite, and this is again what we are seeing here. Could this be a divergence pattern?

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 fell by around .10 points, which can be attributed to the upturn group’s falling risk appetite.

There are two big stories in this client sentiment survey — the significant drop in client fear levels, and the muted move in risk appetite. Client fear levels dropped by around 10% from survey to survey, fueled by a market rally that started in August and is now up around 15%. If the rally can manage to sustain itself, it’s likely that client fear levels will continue to drop. Maybe one day, we’ll even see client fear levels at the exact opposite end of the range, below 10%. On the other hand, we would expect risk appetite to continue to rise in-line with the market. This week, we saw the upturn group’s average actually move lower, which may be a divergence pattern (we would expect the risk appetite to move higher with the market, versus diverging from the expected pattern-but that dataset is so young that we may just not yet know what to look for or how to interpret it).

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!

Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions! Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients. It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good! It’s painless, we promise.

Our latest sentiment survey was open from 10/22/10 to 10/29/10. We had nearly the same response rate as last survey, with 94 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. The broad stock market has managed to extend its rally from survey to survey. Once again, the S&P 500 rose around 1.5%, and client fear levels reflected this move. Around 81% of clients were more afraid of losing money, versus last survey’s reading of 84%. On the flip side, we saw the missed opportunity camp notch higher from 16% to 19%. It’s encouraging to see clients dipping their toes back into the broad market. We can also see evidence of this shift in mindset in last week’s Fund Flows data from Andy.

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. Right now the spread is around 62%. This chart is a nice graphical representation of the gradual shift towards more risk as the market continues to rally.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

Chart 3: Average Risk Appetite. Average risk shot out of its range this week in a big way. This week’s average risk reading came in at 2.62, up big from last week’s reading of 2.35. Right now average risk is sitting at its highest point since April, which is in-line with our other indicators. The rally that started from the August lows seems to be having a big effect on client risk appetites and fear levels. Could the “capitulation event” which sends risk appetites soaring be around the corner? It’s anyone’s guess as to where the market is heading.

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 a sizable move towards more risk. The past few surveys have been heavily skewed towards 2′s and 3′s. This week we saw a lot more respondents choose 3, which is also reflected in the Average Risk chart.

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 we see that the average risk appetite for the fear of losing money group is significantly lower than the risk appetite for the fear of missing the rally group — perfect. The upturn group is at the highest point it’s been since late July, and before that, May. If the market can manage to sustain this momentum, this group’s average has the potential to go much higher. On the other side, the downdraft group is sitting at the highest levels since April. That’s a huge breakout, and one of the main reasons that overall risk appetite has risen so much. The “Fear” group, even though they are afraid of losing money, has made an emotional breakthrough towards adding risk. This week, the Downturn group’s average risk was 2.5 (up from 2.3) and the Upturn group’s average risk was 3.2 (up from 2.8).

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 jumped up this week by around .20 points, due mostly to the large jump in the downturn’s group average risk. We’ve noted before that the volatility of the spread is linked directly with the upturn group’s volatile risk tolerance, but this week’s shift is due more to the downturn’s average risk technical breakout.

This week, we saw a big breakout in the downturn group’s risk appetite. The downturn group represents the majority of Joe Investors in the market today — scared about losing money and still in pain from 2008. If I were to describe the group’s investment outlook in a phrase, it would be, “As long as it doesn’t hurt.” So when we see a big breakout in their risk appetite, as we did this round, we take that as a real sign that market conditions are improving, and that maybe this rally does have some “Oomph” behind it. Other than that, all the other indicators performed just as expected with relation to the broad market. Hopefully this rally can hold on, and we’ll see a continued shift towards more risk, and less fear of a downturn.

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!

Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions! Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients. It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good! It’s painless, we promise.

Our latest sentiment survey was open from 10/8/10 to 10/15/10. We had nearly the same response rate as last survey, with 93 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. After a few weeks of solid rallying, the market inched slightly higher for this round of survey, up about 1.5% using the survey data points. As expected, client fear levels ticked slightly lower, down to 84% from 86%. Again, we have a roughly 2% market move which correlates almost exactly with the lower client fear levels. The opposite is true of the fear of missing an upturn group, with 16% up from last survey’s reading of 14%. The question here is whether it will take a 40% move from here to get client fear levels at the 50/50 mark.

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. Again, we see the spread moving towards parity as the market rallies, and the extreme fear levels abate.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

Chart 3: Average Risk Appetite. After breaking out of the tight summer range, risk appetite crept backwards a few basis points to 2.35, down from 2.40. This reading is so close to last survey’s, we would consider it a flat reading. Keeping in mind that the market was up just over 1% from survey to survey, this round’s number fits nicely with our expectations.

Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level. Even with the modest rally and the shift towards more risk, clients are definitely not taking many chances in this market. With this indicator, we would expect the bell curve to shift towards more risk if the market continues to rally into the fall. This round, we had a grand total of zero respondents with a risk tolerance of 5 (Take Risk).

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. Again, zero 5′s out of all our respondents.

Chart 6: Average Risk Appetite by Group. A plot of the average risk appetite score by group is shown in this chart. Here we see that the average risk appetite for the fear of losing money group is significantly lower than the risk appetite for the fear of missing the rally group — perfect. Interestingly, this round the upturn group’s risk appetite actually dropped as the market rallied. Have we stumbled upon a new contrarian indicator? We’ve noticed before that the upturn’s group risk appetite is significantly more volatile than the downturn’s group, and this is what we see here again. This round, the upturn group’s risk appetite was 2.8 and the downturn group’s risk appetite was 2.3.

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 dropped by a fairly signifcant margin this round, moving from .78 to .53. This move can be entirely attributed to the upturn’s group lower risk appetite. We’ve noted before that the volatility of the spread is linked directly with the upturn group’s volatile risk tolerance.

This round, we saw a muted market move coupled with a muted client sentiment move. The market rallied modestly, and client fear levels fell by about as much. Again, we are seeing short-term market performance closely tied to long-term investor sentiment, which usually leads to emotional decisions based on relatively irrelevant market performance. The upturn group’s risk appetite actually fell this week, despite the small market rally. Contrarian indicator, anyone? Only time will tell!

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!

Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions! Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients. It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good! It’s painless, we promise.

Our latest sentiment survey was open from 9/24/10 to 10/1/10. We saw a decrease in the response rate, with 91 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. Now we got a rally going! And guess what…client fear levels are moving in-line, as predicted. Using only the survey data points, the market has rallied around 8% since August. 86% of clients were afraid of losing money this round, versus 14% of clients who were afraid of losing out on a rally. Contrast this with the most recent August lows, where 94% of clients were fearful of losing money. Let’s do some simple math: An 8% market rally corresponds to an 8% client fear level move! The two are moving lock-step with each other. The only question is whether it’s going to take a 40% market move to get client fear levels to a 50/50 split. Only time will tell.

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. Same as with the general fear numbers, the market move has corresponded exactly with a move in the spread between the two groups. Right now the spread is at 71%.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

Chart 3: Average Risk Appetite. The market move has led to the average risk appetite scoring the highest number since May! That’s a big breakout after holding a pretty tight range for the entire summer. Right now average risk appetite is 2.4, up from last week’s 2.3, and well off the most recent lows of 2.0. It’s great to see all of our indicators working exactly as we thought they would.

Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level. Even with the modest rally and the shift towards more risk, clients are definitely not taking many chances in this market. With this indicator, we would expect the bell curve to shift towards more risk if the market continues to rally into the fall.

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 we see that the average risk appetite for the fear of losing money group is significantly lower than the risk appetite for the fear of missing the rally group — perfect. Both averages have spiked in-line with the market, which is also reflected in the general average risk appetite chart. This time, we saw the upturn group have a little bit more volatility, but not as significantly as we’ve seen before. Currently the average risk appetite of the downturn group is 2.3 and the risk appetite of the upturn group is 3.1.

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 has become a little bit more stable during the rally, as both groups react to market performance at around the same pace. Right now the spread is .78, up about 10 basis points from last week’s .66. It’s not that large of a move considering that we’ve seen moves of close to 50 basis points in just two weeks before.

The current survey numbers show just how consistently client sentiment is linked to short-term market performance. We see an 8% market move, we get an 8% fear level move. Is it really that simple? One would hope not, but unfortunately, all signs point to “Yes” at the moment. Short term market performance should not be closely tied to long-term market outlook!! But it is. Advisors, it’s clearly a tough job to keep your clients’ emotions in check.

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!

Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions! Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients. It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good! It’s painless, we promise.