Trader’s Narrative

The neutral and meandering sentiment landscape continues…

CBOE Put Call Options
Let’s start with the one sentiment indicator which showed some form of conviction this past week: the CBOE equity only put call ratio. Last Tuesday, it almost reached the coveted 1.0 level:

Although it came a hair short (0.99) it still approached extreme levels which have denoted important turning points in the market. The only caveat is that there are certain rumors that most of the puts had to do with the Lehman’s (LEH) meltdown, so it is dubious how much general negative pessimism this indicator expresses.

Volatility Index
The VIX and the equivalent Nasdaq volatility index, VXN, have yet to even come close to the high 30’s range which is what we watch for as important gauges of real fear. Right now, this important indicator is not showing enough of an elevated level of fear to merit any of our attention.

Sentiment Surveys
The Investor’s Intelligence newsletter sentiment is little changed with 38.2% bulls and 41.6% bears. The AAII is a bit more bearish which is favorable, taken from a contrarian perspective. But we still do not have the crystal clear lopsided sentiment that true contrarians relish.

Inverse ETF Trading Volume
Trading volume in inverse ETFs has exploded. These ETFs provide reverse performance - for example, Short Dow ProShares (DOG) attempts to give investors and trades the inverse of the Dow Jones’ returns.

These are the vehicles of choice for traders who aren’t familiar with short selling, or perhaps not comfortable with the idea or do not have the margin required. By going long these inverse ETF’s they can in effect, establish a short position. Not surprisingly, when the trading volume in these type of ETFs spikes, it is a sign of pessimism in the market by a select group of participants.

Currently, present inverse ETF volume levels correspond with market turning points in the S&P 500.

Conclusion
Still mired in the middle. Nothing truly compelling for either the bears no bulls. With the resolution of some of the uncertainty surrounding Lehman Bros. (LEH) over the weekend, we can hope that the fog lifts a bit.