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Warning, brokers may be verging on optimistic

10th July 2013

Every quarter we take a look back at the trade ideas institutional brokers have been sending to their clients, in order to figure out what the overall mood of the market is. To do this we analyse the types of ideas being sent and, in particular, the number that are long or short.

Following on from last quarter’s cautious sentiment report the second quarter was a volatile one for the markets. The main drivers  were fears of  a wind down in Fed stimulus measures, and mixed reaction to announcements from Japan. However sentiment has actually taken a positive turn this quarter. In fact what could have been just a bounce-back in sentiment in late February was the start of a positive run that has continued since.

Overall, sentiment-wise, this quarter has been the most positive since we started reporting on this blog. The average weekly long/short ratio was 67% and ended close to a 12 month high at over 70%. This is compared to an average of 64% in Q1. Typically a long/short ratio of 66% or above (2 longs for every short) is considered bullish. The last time sentiment was above 70% the market was just setting out on a meteoric 15%-20% rise.

In fairness there was a slight blip towards the end of May, as the markets faltered, but sentiment picked up again quickly ahead of the market turnaround in early June. This is typical of the way the TIM Ideas sentiment can behave. As the market first falls, the long/short ratio may drop a bit but, if the brokers are confident in the longer-term picture, sentiment will then start to rise. If the market continues to fall, sentiment can continue to rise as long as that longer-term picture remains and they see more and more buying opportunities.

Looking at the past 12 months as a whole it’s possible to observe an interesting broader trend. As alluded to, shorter term sentiment can move in an opposite direction to the market. This is most likely a manifestation of a ‘buy low sell high’ dynamic. However over the past 12 months the underlying average long/short values have been steadily increasing along with the market. Hopefully this is a sign that continued, structural confidence is returning to the equity market, but only time will tell.

Looking ahead it will be interesting to see if the trend continues. There was a sharp rise near the end of the quarter when the markets fell so you might expect a few more shorts if markets continue to rise. However the brokers seem to have been doing pretty well in their predictions so far this year, so fingers crossed!