Trader’s Narrative

Here’s this past week’s overview of sentiment data:

Sentiment Surveys

The retail investors and traders tracked by the AAII weekly sentiment survey continue to pull in their horns. The bears came in at 49% a 4% points increase from last week and the bulls were at 40%, a 6% increase from last week. Pulling back to provide some perspective, we’re still mired in no man’s land - neither optimistic nor pessimistic.

Similar to last week, the Investors Intelligence sentiment survey of newsletter editors was almost unchanged. There were 40.9% bulls, 28.4% bears and the rest neutral. The next test of sentiment is how it will react to a fall in stock prices. Will people throw in the towel? or persist in a new found optimism?

TED Spread
Although it was prominently featured everywhere just a few months ago, the TED spread has fallen off everyone’s radar now. After reaching a climax on October 10th, 2008 it has continuously fallen lower to reach levels that it was trading at in early August 2007:

It still has quite a ways to go to reach the multi-year lows of 15 but it is just another indicator returning to normal and signaling that the worst is over for the credit markets.

Volatility
The volatility index (CBOE’s VIX) continues to take one step forward, two steps back - slowly grinding lower. It gave up the 30 level again this week on its way lower. Mr. Market is remarkable, who would have every imagined that we would be seeing 30 as ‘low’? For a long term chart of the VIX and further details on what this means for the market, check out Volatility Continues To Melt Lower.

Options Sentiment
The ISEE (equity only) call put ratio was elevated for the whole week and for Friday it was 237 - meaning that for every 100 puts, retail option traders were purchasing 237 call options. To find an ISE sentiment index reading higher we have to go back more than 2 years to the last day of trading for the year on December 31st, 2007 when the ratio was 241 (and the S&P 500 closed at 1468.

Even so, I’d prefer to see more than a one day spike because the last time something similar happened, it turned out to be completely false. It was on March 9th when the ISE ratio doubled within a few days. But that was exactly when the market started this confounding rally. For that reason I’d prefer to see more than a few days of such extreme optimism.

The CBOE (equity only) put call ratio hasn’t confirmed the ISE optimism - which is another reason to not be jumpy. This week’s put call ratio was moderately higher but we didn’t see a significant change so the chart I showed in last week’s sentiment overview is still helpful.

Here’s this week’s walk through the sentimental landscape:

AAII
The retail investors, as measured by the weekly AAII survey are paring their new found bullishness. The bulls are down to 34% while the bears increased to 45% (each going in the opposite direction by 10% points from last week). Although this is an about face, it only takes us to sentiment territories we have occupied since late March.

Investors Intelligence
The newsletter editors on the other hand as sticking to their guns. According to ChartCraft, this week the II bulls are at 40.7% - almost unchanged from last week - while the bears were 29.1% - down slightly from last week.

ISEE Sentiment
Although we closed the week down, and Friday flat, the retail options traders, as measured by the ISE sentiment, were quiet ebullient. They spent the entire week see-sawing up and down then on Friday they bought twice as many calls as puts, putting the ISE sentiment index at an even 200 (equity only).

To get some perspective on this, see last week’s sentiment overview which showed a chart of the ISE index and a short term moving average. All in all, such optimism has easily tripped up the market in the past.

CBOE Put Call Ratio
We see the same nonchalant display from the option traders at the CBOE. The put call ratio (equity only) continues to drip lower, reaching for the uptrending channel that it has occupied for some time:

The 21 day simple moving average has been a good guide for timing the market with this indicator. Whenever it has fallen to similar depths, the market has had either a tough time or fallen precipitously. But, as you’ll notice, the CBOE put call ratio has been behaving rather bizarrely throughout this bear market.

The S&P 500 has managed to sustain an uptrend even as the put call ratio has fallen to levels which previously would have halted it in its tracks. Arguably, the market should have stopped going up sometime in April. Of course I mean that facetiously because I’m not about to tell the market what it should or should not do.

The Grey Beards
I keep track of a few ‘grey beards’ - investors who have lived through several bear and bull markets and have the scars to prove it. The 71 year old Steve Leuthold of Leuthold Weeden is one of them. He called the March bottom almost to the day! Click to watch the Bloomberg video here (from March 4th 2009).

Keep in mind that he runs a short fund aptly named Grizzley Short Fund. But he’s agnostic enough (and brilliant enought) to see opportunity when it presents itself. Since having changed his position, he now is considering adding to his longs - for details see this article (and video) from Bloomberg that I already showed you at news.tradersnarrative.com

Here’s this week’s march through the stock market’s sentiment:

Investors Intelligence
This week’s stock market newsletter editor’s sentiment data gathered and categorized by ChartCraft shows that there is a slight increase in the number of optimistic newsletters. There are 28.4% bulls and 44.3% bears. The bearish side has decreased by slightly more than the bullish side increased.

AAII
There are big moves in the retail sentiment data from the weekly American Association of Individual Investors survey. This week we have 45% saying that they are looking for higher prices. That is a +17% point jump from last week. And on the flip side, we have 38% bearish, an equal amount of change (-17% points) the other way around. This is something that I mentioned to watch for as we saw an extreme in this indicator a few weeks ago. The fact that so many have so quickly jumped on the rally bandwagon once again does not bode well.

CBOE Put Call Ratio
The options market is showing a lopsided sentiment with much more calls being traded than puts on the CBOE:

Similarly, the ISE sentiment (measuring call to put ratio among retail option traders) also shows renewed optimism.

Market Breadth
Another reason to be concerned for the health of this rally is that we hit the wall for market breadth. On Wednesday, almost every single security in the S&P 500 Index (SPX) was trading above its short term 10 day moving average. This is the highest we’ve seen it for at least 3 years:
Continue reading ‘Sentiment Overview: Week Of March 20th, 2009′

Here’s a quick recap of the sentiment data for the past week:

Sentiment Surveys
We are finally seeing some initial bullish patterns emerge from sentiment surveys. I mentioned repeatedly that what I would prefer to see was a situation where the sentiment would become more bearish as the market rallied. Until this week, we had seen a quick about face in sentiment with many jumping on any rally and switching from pessimism to optimism. But this week provided a slightly different take on this.

The Investor’s Intelligence which monitors newsletter editors showed bulls decreasing almost 6% points to 23.1% and bears increasing almost the same amount to reach 49.5%. While the number of bears is down significantly from its peak at 55% in November, what is encouraging is that this slight increase in bearishness corresponds with strength in the stock market.

Similarly, the AAII sentiment released this week shows that bearish sentiment increased 3% points to 48% and bullishness decreased 4% points to 27%. The weekly survey comes out on Wednesday, which means that while the S&P 500 is at a slightly lower - almost equal - level (850-860) to last week, sentiment has definitely soured.

This is a good sign, from a contrarian point of view. However, I don’t want to get too excited because it is just one data point. If we start to see a dispirited response to a continuing rally, in the coming weeks, then it will be a tell tale sign that the rally will stick. Otherwise, if we again see sentiment do an abrupt about face, we’re headed down (again).

Options Market
Here is a chart of the equity only ISE Sentiment Index showing the contraction that I pointed out a while ago is still continuing:

I’m not sure what this means. Perhaps the ISE has simply changed and is no longer able to provide the same signals because there has been a fundamental change in the participants. Or maybe there is another explanation? Any ideas?

The traditional perspective on put call ratios from the CBOE continues to be ambivalent, at best, and downright confusing at worst.

I took a few days off (hope you didn’t miss me too much). Let’s catch up by looking at the important sentiment developments:

ISE Sentiment
I mentioned the ISEE during last week’s sentiment overview when it increased slightly as the market fell, showing that retail option traders were seemingly not worried. Even more bizarre, during the past shortened trading week as the market staged a strong recovery, the ISEE value actually fell.

Part of the explanation for this aberrant behavior may be that I’m looking at the “All Securities” data for the ISEE, rather than the “Equities Only”. The latter measure showed no similar increase for the week of May 23rd.

CBOE Put Call Ratio
Again, in contrast to the ISEE’s behavior, the CBOE equities only put call ratio showed this past week that traders became more bullish as the market rose. Although not the ideal, this is the normal pattern.

The put call ratio fell to 0.59 - approaching levels of bullishness which have previously caused stock market rallies much difficulty.

Hulbert Newsletter Sentiment
According to Mark Hulbert, the Hulbert Stock Newsletter Sentiment Index (HSNSI) has almost doubled from +16.2% to +31.2%. And it did so from mid May to the end of May 2008. Although this is an significant increase, I don’t think it presents us with a situation commensurate with market top.

To give you an idea, during mid to late April 2006 the HSNSI reached +73.2% - when the S&P 500 index soon after fell from 1325 to 1225. And during the bear market bottom in October 2002, it fell below -60%. So all I can say from the current reading is that more newsletter editors are jumping into the bullish camp but still not enough to cause serious problems.

AAII
According to the American Association of Individual Investors’ sentiment survey, there are now 31% bulls, down 15% points from last week’s 46% bulls.

This is a welcome reprieve, especially as it is accompanied by a lower market. Had this key sentiment survey remained unchanged or actually increased in bullishness, the sentiment tone would be definitely different.

Investor’s Intelligence
Similar to the AAII survey, the II sentiment measure fell from 47% bullish to 37.9%. I was worried about this since last week’s number was almost 50%. The keepers of this measure, the editors of ChartCraft, Burke and Gray agree with my general take on the market’s sentiment:

“While the sentiment is moving away from a bullish reading it is not yet close to calling for a market top”

I continue to see a lot of long term positives for the market and continue to believe the March bottom to be a major one. What I suspect we are seeing is a (hopefully) shallow pull back or pause before the next leg up.

Magazine Cover Indicator
Uh oh. Anyone long crude oil or any traditional energy related equities should be worried.

The Economist isn’t the most widely read publication but their cover stories still do carry weight - in a contrary sense most of the time. The price of crude has already tapered off and I suspect this will be either a significant top or at minimum a longish pause.

There are, of course, other signs that the whole energy rally has run its course. There are several technical signs, including the increasingly sharp slope of the trendlines as well as ominous candlestick formations.