Trader’s Narrative

The market correction that we’d been waiting for has finally started in earnest so let’s take a look at the sentiment data for this week:

AAII Survey
This week’s survey of US retail sentiment by the Association of American Individual Investors came in at 34% bullish (a drop of 7% points from last week) and an increase of bears to 42% (a 6% point increase). While the increased fear is normal after the kind of week we had, the ratio of the two remains neutral. Had the response been either muted or exaggerated, it would have been more interesting. At this point, it doesn’t really offer any edge.

Investors Intelligence
The latest Investors Intelligence poll from ChartCraft showed the bull share fall a smidgen to at 48.3%; the bear share also fell a hair to 22.5%. Only 29.2% believe a correction is due. The ratio of the bulls to bears is 2.15 - higher than it has been for months. It must be noted, though, that the survey was compiled on Tuesday before the losses later in the week. Next week’s survey will reflect the full decline.

Daily Sentiment Index
The Daily Sentiment Index remains in rarefied territory. The high levels we find the current DSI is extremely rare. In the 22 year history of this metric the DSI has been 87% or higher, only five times:

Continue reading ‘Sentiment Overview: Week Of October 30th, 2009′

Last week I wondered if the strength in gold was due to the implicit strength of the precious metal itself or whether it was merely a by product of the weakness in the US dollar: US Dollar’s Weakness or Gold’s Strength?.

It is obvious now that the US dollar is being thrown to the carry trade wolves in order to save the economy. This is the same play that central banks made several years ago with the exception that back then it was the Yen that was sacrificed.

In any case, gold continues to walk higher on the chart - it reached $1,064.20 today at COMEX. The distinction may be a moot one because as long as it continues, those on the right side of the trade will profit. But since there was some questions regarding the way I tried to strip out the US Dollar effect on gold price, here’s another chart which uses a slightly different method:

Source: Elliott Wave Intl

The song remains the same. Gold hasn’t reached a new high when we strip away the effect of the dollar. The second chart above looks at gold relative to a basket of other currencies (Yen, Euro, Swiss Franc, Australian Dollar, Canadian Dollar and the Pound).

Also, as noted previously, large speculators have crowded into the long gold trade. The most recent COT shows them to have 50% of open interest. But in general sentiment towards gold is relatively muted - especially considering the many times it was unable to climb above $1000.

From a purely technical point of view, this is a gold bull market. But I’m trying to deal with some nagging questions. For example, if there is inflation on the horizon, why hasn’t it registered on the CRB? After all the commodity index is rading below its 30 year average and it is flat since June 2009.

Honestly, I can’t see any signs of inflation anywhere. In fact, you don’t have to look hard to see deflation almost everywhere. So the gold story is one written on the back of the US dollar. And with the US dollar sentiment so incredibly negative, it makes me cautious on gold - bull market conditions notwithstanding.

For economic and market news and to see what interesting reading you may have missed last week, check out the list below. To see it all, go to news.tradersnarrative.com:

• 18 US Banks Miss TARP Payments
• The Missing Paul Tudor Jones Tape (he uses Elliott Wave!)
• Initial Public Optimism - The IPO Market Bounces Back
• Will “Cash-on-the-Sidelines” Really Drive Stocks?
• Get a FREE Subscription to Futures Magazine (limited time for US residents only)
• Taibbi’s Upcoming Article on Naked Short Selling
• Good Trades are not Sexy
• Larry Summers and the White House economic team
• FREE 50-page eBook: The Ultimate Technical Analysis Handbook (lmt time offer)
• Contrarian analysis of current gold market

The above is a tiny sample, for the full list, follow the link to news.tradersnarrative.com:

And remember to check back regularly since there are interesting links added throughout the week. If you are a twitter user, add the news.tradersnarrative.com twitter stream to get new stories in real time.

The Week Ahead:

Here is this week’s roundup of sentiment data for the stock market:

Sentiment Surveys
AAII slight increase in the bullish camp and an 11% decrease in the bearish camp to bring both to 38% with 24% left over as neutral. That leaves us with no real edge, again.

Last month I mentioned in this sentiment overview that the AAII asset allocation to bonds was at a historic extreme (at 25% of the portfolio). The new AAII asset allocation for bonds is 17%, down 8% points, which is still a tad on the high end but no longer extreme. The equity allocation notched up slightly to 54% and cash to 29%.

The Investors Intelligence sentiment data for this week twitched slightly but we have more or less the same picture as before. The bulls declines slightly to 50.6% and the bears increased from their historic low to a more normal 24.1%. Of course, the bulls continue to dominate and the bull to bear ratio is once again above 2.

The Daily Sentiment Index from Jake Bernstein continues to show a rather frothy mood on the street. This week it was still at the elevated levels from last week (88%) while the Nasdaq futures traders were equally optimistic at 87%:

Citigroup Economic Surprise Index
Unemployment inched closer to 10% with today’s announcement of 216,000 jobs lost in August. But it is rarely the data itself that is important. Much more important is how it is interpreted and how the market reacts to it. And believe it or not, there is an index for that. The Citigroup Economic Surprise index measures whether economic data are better or worse than expectations.

When we have a streak of really good economic news, being human, we become acclimated to this new environment and come to expect further good news, discounting what once might have been actually very good news. Of course, a streak can’t continue forever and we become ‘disappointed’ by less than stellar news. In any case, right now the Citigroup Economic Surprise index is at its highest historical range. This means it is more and more difficult to wow the market with good news. Not surprisingly, in the past this has accompanied market tops.

Volatility
Volatility, as measured by the CBOE VIX index continues to be mired in the ~25 range which is the new support (previously resistance in 207 and 2008). Either a decisive break to the 20 range or higher to break the declining trend (above 30) would make me sit up and take notice. Until then it is boring me.

Reverse Stock Splits
Thanks to this brutal bear market we have heaps of previously well to do stocks which are now trading below $5. That is a significant line in the sand because most institutional managers have a mandate to only touch equities above that threshold. This is to protect investors from speculative issues like penny stocks. Rather than let their stocks scrape the bottom of the exchange, most corporations fall back on a sleight of hand trick called reverse stock splits to magically raise themselves above that institutional $5 level.

While it may seem to be a transparent trick, you may think it would be lucrative because it would allow institutions to once again have access to the stock in question. However, a recent study from Credit Suisse by Sveinn Palsson shows that since 1980, a reverse stock split does not raise the stock’s price. Instead, the median one month return after the corporate action is actually negative.

Today previous stalwarts are lining up to file reverse splits with the SEC. AIG did one in July. Citigroup filed just recently. And the list of sub $5 stocks goes around the block: CIT Group (CIT), E-Trade (ETFC), Huntington Bancshares (HBAN), Regions Financial (RF), Keycorp (KEY), etc.

Party Like It’s 1999
Here is a funny anecdotal sentiment observation. The design to the left is for a t-shirt website called threadless. This is a site where anyone can submit an original design and based on the votes it garners the staff pick about 10 designs every week.

In any case, this design is the ’sign of the horns’ - an ancient hand gesture which has different meanings depending on the era, location and culture. But basically, in this context, it is about exuberance, to put it politely. And it is mounted on top of the iconic Wall Street bull statue instead of its head. Somebody is partying like its 1999.

Hmm… that reminds me, where was it I saw trading t-shirts?

Here is this weeks summary of sentiment data for the stock market:

The weekly AAII measure of sentiment continues to reflect a repentant US retail investor. This week the bulls were unchanged at 34% while the bears increased 9% points to 49%. This is a very abrupt change as it was just 4 weeks ago (Sentiment Overview: Week Of July 31st, 2009) that we had the mirror opposite with 48% bulls and 31% bears. And it was only 2 weeks ago when we saw 51% bulls! This is especially meaningful as the market is actually trading higher

Meanwhile, the Investors Intelligence Advisors Index - a metric of the mood of stock market newsletter editors - is finally showing extreme levels of bullishness. This week’s results pushed the bulls slightly upwards to 51.5% while at the same time reducing the bears to just 19.8%. That widened the gap between the two camps to almost 32% points or put another way, we now have almost 3 optimistic editors for every gloomy one.

So it took the II a few weeks to arrive at the +50% levels of bullishness that we saw from the AAII earlier this month. But while the AAII’s recent lopsided sentiment corresponded to the swing top in May 2008, the discrepancy in the II is even more ominous.

The last time we had less than 20% of the stock market advisors bearish was in October 2007 - the start of the bear market. While the percentage points between the two camps isn’t as wide as in October 2007 (40% points), it is 31.7% points - close enough to merit caution for the bulls.

Right now, looking at these two popular sentiment metrics can be confusing. Either one is ahead of the other or they are both wrong. Fortunately there are many other indicators we will take a look at after the jump.
Continue reading ‘Sentiment Overview: Week Of August 28th, 2009′