We are looking forward to the panel at the CFA dinner in Sarasota on February 9 (cfatampabay.org/net/home). Brian Singer (Wm. Blair & Co.) and I will be joined by Ned Davis, with Ben Padilla (Northern Trust) moderating. We at Cumberland have been users of Ned’s database for many years. It will be nice to see him again and share some time.
In that spirit let me cite three of the many series available to Ned Davis Research (NDR) subscribers (www.ndr.com). These are the types of things that give us some pause about the level of the US stock market, and they are part of the reason we are holding some cash reserves and are not fully invested as this note is written. Of course, all that could change at any time and may have changed by the time we get to the Feb. 9 dinner.
Ned Davis Research tracks an NDR Crowd Sentiment Poll on a daily basis. They have more than 20 years of data in this series. For NDR users, it is series S574A. As this is written it is measuring about 70. For reference, there are few peaking periods above 70. On the low side, the extremes have been in the 30s. In the 2007–08 period, before the selloff, the peak was 72.2. The 2009 bottom low on this sentiment index was 30.9.
Statistics for this series are also compiled and updated by NDR. I will round some numbers for readers’ ease. This measure of sentiment has been above 66 for 22% of the time. During those periods the annualized rate of change in the S&P 500 Index was negative 6.4%. The sentiment measure has ranged between 57 and 66 for 18% of the time and reached there by falling from a higher number. Then the average annualized S&P return was about zero. Twenty percent of the time the level of 57–66 has been reached from below. Then the average annualized return rate was 21%. And lastly there is the 40% of the time that this measure has been below 57. Then the returns averaged 10%. By the way, a buy and hold on the S&P for the entire period gained at an annualized rate of about 6.4%.
Clearly, a level above 66 constitutes a warning, and certainly one about 70 or higher is a flashing yellow light. NDR characterizes the present level as “extreme optimism” and therefore concludes that it is a bearish warning signal.
NDR also tracks insider selling on a weekly basis against an “all-cap” equity series. The series is NIR201. Categories are depicted in detail in a matrix that has four parts: bullish, bearish, neutral, and buy/hold. Mean returns for forward periods are calculated at 1, 4, 13, and 26 weeks. Only 15% of the time have all four periods been measured as negative numbers. We are currently in a period where the insider selling measures have reached the bearish negative-return forecast level. The data series is over 20 years in length.
NDR also tracks the Conference Board’s Consumer Confidence Index versus movement in the Dow Jones Industrial Average. See NDR’s Chart S1060A. Here the data set is monthly and covers about a half century. The index just hit a 15-year high. That puts it at a level reached only about 22% of the time, and the history of such a level shows an average annualized return for the Dow of about zero.
Not all of the many NDR series are negative; many are neutral, and some are positive. Users of this database have a wealth of information available and can look at all of it to make their own decisions.
Conversation at the CFA forecast dinner is going to be stimulating. We are currently holding a cash reserve in our US ETF managed accounts. We are not fully invested, as Barron’s readers noted in emails after seeing the article on page 27 of this past weekend’s (January 30, 2017) edition. We thank Ned and his extensive team for decades of great service and marvelous data. We will toast him on February 9th.
