Trader’s Narrative

Here’s a brief run down of the current sentiment picture from the widely followed sentiment surveys:

AAII:
Having recovered from a bout of deep bearishness, the survey shows 43% bears and 35% bulls. This rescues the bull ratio from the extreme levels it had reached recently (not seen since April 2005 and March 2003) but it still leaves sentiment in the bearish camp , which according to contrarian thinking is bullish going forward.

Investor’s Intelligence:
The survey from last week shows 42.2% bulls, 34.5% bears and the rest neutral. The II bull ratio has recovered from its multi-year low but it is still squarely pointing to a very pessimistic newsletter community. According to the II bull ratio, things haven’t looked this bad since mid to late 2002, when as a contrarian you would have been buying hand over fist.

Hulbert Newsletter Sentiment:
The latest data I have is of the HSNSI at 18.8% which by itself would show a lack of bullishness. However, in the face of a market decline, it doesn’t help the odds of a rally for sentiment to be increasing in bullishness as the market indexes fall.

LowRisk:
The survey released today shows a 6% point decrease in bearishness to 40% and an increase in bullishness from 24% to 34%. However, the jittery nature of LowRisk makes it difficult to interpret. Applying a smoothing average helps but introduces lag. Right now the LowRisk bull ratio is clearly bearish, which through contrarian lenses is bullish. But it isn’t as bearish as previous readings during late 2005 and early 2003.

Market Vane:
According to Market Vane, leading market advisory services and CTA’s are 62% bullish. During this market swoon, the reading got as low as 55% but recovered even as the market continued to fall. The readings for the past few years have remained stubbornly high in the 60-70% range. This is contrasted to the early 2000 when bulls were as few and far in between as 20% (during the middle of 2002).

Consensus:
The latest survey shows 40% bulls with a drop of 8% from the previous week. This is the lowest reading since the 2005 spring bottom. At that time the lowest bull reading was 30%.

Ticker Sense Blog Sentiment Poll:
Having only 4 data points, this sentiment measure is the most difficult to interpret. Since its debut, the bears have increased from 31.43% to 45.45% while during the same time the S&P 500 rose from 1267 to 1277 (although with a dip in between).

Investor’s Intelligence (II) is one of the oldest measures of market sentiment we have. It has been continuously calculated each week since its founding in 1963. Right now it is overseen by Michael Burke of Chartcraft. Every week he decides if each of the more than 100 market newsletters included in the II is bullish, bearish or neutral. These results are released usually over the weekend.

It is important to note several key characteristics of this particular sentiment measure. For one, it is not a measure of individual investors or those who are actually comitting money to trades or investments. Rather, it measures the advice that newsletters are giving their clients. And as you would expect, newsletters have a naturally bullish tendency since they are trying to sell themselves.

As well, for the II ‘neutral’ means that the newsletter is bullish longer term but is expecting a short term correction. The determination of whether a newsletter is classified as bullish, bearish or neutral can be confusing sometimes. Michael Burke has mentioned that he looks at what the tone and general market commentary of the newsletters, not just their specific recommendations.

Over its long history, II has captured the majority of key market turning points. Even so, II is best used for intermediate to long term market timing. Checking in every single week is not really necessary (although for market junkies it is par for the course). Like most sentiment metrics, II is better at finding bottoms than market tops. The tops that it has flagged have usually been quite early.

Some common ways of looking at the II data is to isolate the bullish and bearish data and graph them together. Another method is to calculate a bullish ratio by dividing the bullish numbers by the sum of the bulls and bears (ignoring neutral readings).

In case you’re wondering, right now Investor’s Intelligence is 38.7% bullish and 34.4% bearish. The bull ratio is 53% signalling oversold. Although this is a sign of nervousness from newsletters, in late 2002, this ratio reached an even more extreme 40%.