Small-cap ETFs recently broke out to record levels while the S&P 500 is nearing its all-time high from 2007. Investors are growing more bullish on stocks and the CBOE Volatility Index is the lowest it has been in about five years.
Market participants are getting optimistic but that could also mean the market is a bit exhausted in due for a pullback.
“Aside from technical indicators being at, or close to overbought, our Advisors Sentiment Survey is also now showing evidence in favor of a market retreat. The difference between the number of bullish and bearish advisors, known as the bull-bear spread, is nearing the danger level of 30%,” Investors Intelligence technical analyst Tarquin Coe wrote in a note this week.
“The two previous tests of that level over the past year coincided with market tops,” Coe said. “On both occasions, pull-backs of around 8 weeks in duration followed, with the S&P 500 shedding around 10%. We continue to stress caution.”
In the latest Investors Intelligence Advisor Sentiment Survey, bulls climbed to 51.1% while bears fell to 23.4%. “The shifts for both the bulls and bears jumped the spread between them to 27.7%, from 23.3% a week ago. The latest market has expanded the spread to near dangerous levels around 30%,” according to the weekly survey.
Meanwhile, technical analyst Andrew Thrasher sees more data that “points to a frothy market.” Investors have raised their margin accounts at the NYSE to the highest level since February 2008, while inflows into long-only equity mutual funds have hit their highest level since March 2000.
Investors are also upbeat following the 16% gain for the S&P 500 last year.
Morningstar data that tracked U.S. stock mutual funds indicated that every category has posted double-digit gains with mid-cap value’s 16.5% advance leading the way. Small value funds had the best fourth quarter, up 3.8%, to finish the year up 16.1%. Overall, value-stock strategies beat growth strategies, reports Jonathan Burton for MarketWatch.
Small-caps ruled the ETF industry, gaining 17.1%, with the iShares Russell 2000 Index (NYSEArca: IWM) gaining 16.7%, while the iShares Russell 2000 Value Index (NYSEArca: IWN), returned 18.1%. [ETF Spotlight: Small-Cap Value]
Also, mid-cap ETFs rose 16% with the SPDR S&P MidCap 400 (NYSEArca: MDY) up 17.8%. Furthermore, large-cap ETFs gained 14.7% on average, but the broad-based Vanguard Total Stock Market ETF (NYSEArca: VTI), rose higher to 16.5% for the year. [Total Stock Market ETFs]
Overall, sectors that performed well include financials, up 24.5%, consumer cyclicals rose 22%, health care was up 21.7%, industrials advanced 19.3% while real estate funds gained 17.7%.
“If 2013 were to be a ‘normal’ year, U.S. equity returns would likely be good, but not great, as the S&P 500 would record a gain in the mid-to-upper single digits,” Sam Stovall, S&P IQ chief equity strategist, noted in a Jan. 2 research report.
Tisha Guerrero contributed to this article.