Fear and Greed Collide in the Stock Market

I have always felt that sentiment indicators of the broader market are of limited value to investors trying to determine whether to buy or sell.

…Last week, for example, I pointed out evidence in the financial press that many investors were growing fearful of their market, as evidenced by news that some investors were taking big stakes in calls on the CBOE Volatility Index (VIX).

…But while some might be nervous about the Nasdaq hitting fresh highs and a Dow that is back over 18,000 – creating a proverbial “wall of worry” that should support further gains – there are plenty of signs that other investors are punch drunk on the stock market’s six plus years of success.

The VIX is currently a relatively low 12.74, and it fell by almost 9% Monday as the broader stock market rallied modestly.

…A piece in the Financial Times Monday states that short-only fund managers “are a rare breed which have become only rarer in the last five years.”

…The reason for this decline, according to the Financial Times, is that “shorting is hard, particularly when stock markets keep going up, as they have done for the last five years.”

…Meanwhile, a piece by Bloomberg points out that cash flows into mutual funds that engage in hedging strategies “have slowed this year to the weakest pace since 2008.”

…The article points out that hedging-type funds, which include non-traditional bond funds and alternative stock funds, attracted just $1.2 billion from investors in the first five months of 2015, according to Chicago-based fund tracker Morningstar, down from $39 billion last year and a record $96 billion in 2013.

…According to Bloomberg, this drop in investor interest turns out to be a setback for firms such as Goldman Sachs Group ( GS ) and Pacific Investment Management Co.

…When stocks and bonds are heading north, investors tend to avoid alternative approaches that play on hedging.

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