Trader’s Narrative

After seeing a 25% rally, the reasons to be cautious continue to pile up:

ISEE Index
The ISE call put ratio, otherwise known as the ISEE index started the week off fairily high. The equity only sub-index came in at 169 on Monday and continued to stay elevated. On Tuesday it was 170 and today it closed at 167.

I’ve found the ISE sentiment tough to decipher during this bear market because of how strange it has acted but the 3 continuous days at 169 and higher show a level of call buying that we haven’t seen since very late last year (Christmas and beyond). That, as you’ll remember, was a very poor time to be bullish on the stock market.

CBOE Put Call Ratio
The more traditional put call ratio - also equities only - shows a similar picture. Here’s a 21 day moving average of the CBOE put-call ratio with the corresponding tops in the market:

Cramer Bullish
Remember Jim Cramer? The guy who was gutted like a fish by Jon Stewart? The guy who went on TV, almost weeping, telling people late last year to take their money out of the market for the next 5 years? Yeah, that guy, he’s bullish again and leading “Cramerica”, once again, to the slaughterhouse. Last Thursday he announced that the “depression” is over and the market has seen the bottom.

Earning Season
With the Alcoa (AA) kicking off earning season, we are now in a market cycle which lasts about a month and which is well known for its weakness. I’m not sure why exactly earning season is a bad time historically to be invested in the market but it is. Numerous studies have shown it to varying degrees. You can stay up to date with this earnings calendar from the Wall St. Journal.

Sentiment
Finally, as I’ve mentioned already in previous sentiment overviews, we’ve seen a general return to optimism through the various sentiment indicators and surveys. Although some of this is to be expected and warranted for a return to normalcy, it is another element we have to throw into the pot.

With earnings season once again around the corner, this perspective on the market has extra relevance:

Source: Decision Point

Once in a blue moon, the market trades at prices which take it to a “value based buying opportunity”. But notice that looking back, it hasn’t for a long time. According to this chart, if we do revisit that scenario again, we would be at levels last seen in 1996 (S&P 500 ~650).

Which reminds me of this other chart, showing just how low a serious bear market can take prices.

I highly recommend Decision Point, the source of the chart above. Thanks to Dr. Brett, you can have free access to their great site until October 26th, 2008. Just login as a regular member would using User ID: magic55 and Password: moments.