Trader’s Narrative

Sentiment Surveys
The common sentiment measures like AAII and Investor’s Intelligence haven’t changed significantly from last week so I won’t delve into the details. Most are continuing to show some level of bearishness, which as contrarians we should find comforting.

Consensus’ bullish percent continues to fall faster than a pervert’s pants. It is now at 23% - the lowest since early 2003, when the cyclical bull market began.

LowRisk, being the schizophrenic measure that it is, has now swung completely to the other side. From last week’s 64% bearish to only 36% bearish this week. The bulls are at 46%, easily outnumbering the pessimists.

ROBO Put/Call Ratio
The CBOE equity only put call ratio is the most famous measure of option sentiment but there are a few others. I’ve mentioned the ISEE Index several times (gathered from the ISE options exchange).

I think it is high time I mentioned another. The ROBO ratio is a concoction brewed every week by Jason Geopfert, of SentimenTrader.com

The simplest and most common use of options by unsophisticated traders is to buy a put or buy a call. So Jason takes the detailed raw data from the Options Clearing Corporation, finds the trades for 10 contracts or less to open a position (both puts and calls) and uses them to calculate a ratio. Hence the name: Retail Only, Buy to Open. Simple, and straightforward; but ingenius. That’s Jason for you.

The only disadvantage is that there is a week’s time delay so it is best used in the long to intermediate time frame.

Right now the ratio is at 0.68 - in lieu of a chart: in recent years we’ve seen these levels in July 2004, August 2006, and March 2007.

Meaning that right now, retail option traders are skeptical of the stock market’s ability to recover. As they’ve been since the beginning of the year.

Commitment of Traders
The most recent Commitments of Traders report is showing the commercials (aka, smart money) slightly more net long. at $7 billion (aggregate futures contracts).

That’s a far cry from the unbelievable extremes that they reached last summer in August. Starting in July 2007, as prices declined, the commercials doubled up on their long bets again and again until they reached a brain melting $40 billion net long exposure in August (see chart):

In contrast, the small speculators category (aka, dumb money) decreased their net long exposure to $11 billion net long. In January, they were at an extremely low $6 billion net long (aggregate futures contracts) and are actually still close to their record lows for the past few years.

On the whole, the market underwent a definite extreme position in January. So far it has refused to burst out of that oversold position, preferring instead to meander about, seemingly aimlessly. The danger for the longs is that it could drip lower slowly, not providing any panic short term lows, but instead simply cascading into lower lows and lower highs.

Personally I doubt that because all the indicators that I’m looking at, like those I mentioned above, tell me that we are in a bottoming process. But I could be wrong of course. Maybe there is a piece or two that I’m missing.

The two major groups in the stock market have been and will always continue to be large, well capitalized and well informed “insiders”; and the small, underfunded, emotional, ignorant retail investors and traders.

These two groups engage in a financial dance which invariably concludes in the long term with one group enriching the second. Although they usually don’t take such contrasting positions, at times they can mirror each other.

A good example was in 2000 at the top of the internet bubble. The knowledgeable, “insider” team made up of hedge funds, investment banks, other Wall St. operators and the private equity team sold bits of paper (shares) in exchange for money from the retail crowd.

Right now we are seeing another one of those times. But this time it is the “insider” team that is on a buying spree.

Commitment of Traders
I’ve already mentioned that the commercials were crazy long equity futures contracts and although some time has passed things have not changed. The commercials are long about $38 billion worth of contracts while the small speculators are long their smallest amount since the bottom of the bear market.

Fund flows
According to fund flows data estimates, as the retail investor is fleeing the equity markets and seeking the sanctuary of bond markets and money market funds, the institutional investor is buying with the same intensity. Watch video about half way on the link.

Insider Activity
Corporate executives and other insiders are probably the most knowledgeable about a company’s future and while the market has taken a tumble, they haven’t been spooked. On the contrary, their buying here is only equaled to that seen at the bottom of the bear market. This in contrast to the retail investor who has been buying anything but US equities.

Newsletter Market Timers
The best market timers among the newsletters are wildly bullish, with an equity allocation of 92%. Meanwhile the worst are out of the market completely with a 0% allocation.
Credit: Mark Hulbert in Barron’s