Trader’s Narrative

Here is the sentiment summary for the Thanksgiving holiday week of trading:

Sentiment Surveys
The AAII weekly survey of retail US investors shows they continue to return to complacency from the extremely pessimistic stance earlier this month. This week the bulls continue to rise, gaining 4% points to 43% while the bears decline 7% points to 32%. The bull ratio is 57% - in line with the long term average. For a chart, check previous link.

ChartCraft’s Investors Intelligence survey of newsletter editors also shows a similar return to complacency after a slight dip last week. There was a slight increase in bulls to 46.1% and a significant drop of bearishness to 21.3% - bringing the ratio back to 2:1 where it has hovered for the past few months.

The US public continues to be wary of equity investments. The Gallup Investor Optimism survey for October showed a slight erosion, back to September levels. This, despite the S&P 500 being about 10% higher than back then.

Source: Gallup

Option Sentiment
The CBOE put call ratio (equity only) ratio continues to show a majority of call purchases as option traders ignore any real consideration of risk and reach to grab more gains. While the short term moving average of the put call ratio has recovered somewhat from the extreme low in mid October it is still quite low:

The ISE Sentiment index which targets retail option traders is showing about the same preponderance of bullishness. The 10 day moving average of the equity only ISE Sentiment closed the week at 187. That’s lower than last month’s ratio but it is still at elevated levels which have corresponded more to tops than bottoms in the past.

Magazine Cover
This week’s magazine cover indicator comes courtesy of BusinessWeek and features a rampaging bull with the title caption: “The New Threat from Wall St.”

While the imagery represents the symbol reminiscent of the stock market, the accompanying article is about the impact that Wall St. is having on municipalities around the US. Rather than being a barometer for the stock market, it is an indication of the prevailing public mood against the excess of Wall Street investment banks.

Over the weekend Barry Ritholtz showed the BusinessWeek cover (below) and since I had been reading the cover article of The Atlantic, it struck me that almost exactly 9 years separate the two:

Time to celebrate. This month, the current economic expansion became the longest in U.S. history. The boom has done more than create millions of new jobholders and stock owners. It has also restored the public’s confidence and given more people than ever a shot at the American Dream. We tell the story in HOW PROSPERITY IS RESHAPING THE AMERICAN ECONOMY.

Source: BusinessWeek February 14, 2000

The crash of 2008 continues to reverberate loudly nationwide—destroying jobs, bankrupting businesses, and displacing homeowners. But already, it has damaged some places much more severely than others. On the other side of the crisis, America’s economic landscape will look very different than it does today. What fate will the coming years hold for New York, Charlotte, Detroit, Las Vegas? Will the suburbs be ineffably changed? Which cities and regions can come back strong? And which will never come back at all?

Source: The Atlantic February 12th, 2009

It would have been perfect had it been BusinessWeek itself with the dichotomous cover. The Atlantic magazine is a much smaller publication than BusinessWeek as well as being a much more general publication. Time will tell if these two covers act as neat bookends for their eras. Also, check out a recent German magazine cover dishing more doom and gloom.

Apologies for the delay, I’ve been trying to keep up with this fakakta market. Here is this past week’s sentiment overview:

Sentiment Surveys
The AAII survey for this week showed only 33.33% being optimistic (bulls), and again, a whopping 55% thinking that the market is going to continue to go down. If you recall, historically, anything above 50% bearish sentiment is very significant. However, sentiment in a bear market is different than that in a bull market. So adjust your lenses accordingly.

The sentiment survey of Investor’s Intelligence by ChartCraft showed only 33.7% bulls and 47.2% bears (with the rest sitting on the fence).

Before we leave surveyland, it is important to note that something has truly scared the average American investor because not only are they very pessimistic as described above, they are now positioning their portfolios so defensively, it has only happened a few rare times. They are holding a +35% in cash, only 51% equities and the rest in bonds. The last time we saw a lower equity allocation for these guys was way back in the throes of the last bear market (late 2002) where it reached into the 40’s.

Options Continue to Confuse
On Friday, as the market continued to bleed, the ISEE sentiment ratio came in at 119, meaning that retail option traders were comfortably buying more calls to open positions than puts!

And the CBOE put call ratio (equity only) came in at an anemic 0.79!

So the options markets continue to confuse the heck out of everyone. I’ve read as much as I could find about it but either people are scrambling valiantly to explain it with outlandish theories or they are outright ignoring it.

The best alternative theory I’ve heard put forward is from Barron’s:

I mentioned sentiment being fearful earlier and certainly the Chicago Board Options Exchange volatility index, aka the VIX, registered some extremely high readings this week. Dubbed the “fear index,” when the VIX reaches extreme highs it often marks a bottom of some kind.
Finally, something for the bull column.
But can we truly believe the VIX, which is based on options premiums? After all, investors are no longer allowed to sell more than 1000 stocks short thanks to a temporary ban. One of the few places to hedge a portfolio is in the options market, and that may be changing the VIX in ways we just cannot know at this point.
Anecdotally, I don’t see the “get me out at any price” fear in the mainstream and financial media. Investors are fearful, but I don’t think they are truly as panicked as we might believe.
So, the scales seem to be tipped for the bears, keeping capital preservation tops on my list of investment activities. The final word from Washington could change things in a hurry, but from the technical evidence we have, this bear market is not over.

The What Spread?
This is truly scary. The TED spread continues to go up. The what spread? Yeah, that’s what a lot of people are wondering too. Take a look at the chart showing the trend of this search query in google’s search engine (worldwide). At the beginning of September, things go bonkers:

The reason I say scary is that it is creeping higher rather than spiking higher. That makes it difficult to know whether the trend has exhausted itself.

Magazine Covers
A qualitative contrarian sentiment guide is the magazine cover. Ideally, it will be tremendously pessimistic and have wide, general public circulation. This week, the only one fits the bill is the Time magazine cover of the 1929 soup line with the title: “The New Hard Times”.

The Economist and Forbes are arguably specialty magazines but their most recent editions’ covers are pessimistic as well. Although, the Forbes one does show the chart going up towards the end. And the article that corresponds with the cover, also hits some optimistic notes, mentioning the large amount of cash on the sidelines (more details on the cash cushion here). So, as pessimistic covers go, it doesn’t really qualify fully.