Trader’s Narrative

Here’s this week’s short but sweet sentiment overview:

Sentiment Surveys
The retail investor’s sentiment as measured by the weekly AAII survey saw the bulls at 38% (a drop of 7% points) and the bears at 43%, with a 10% point increase. While this is a small increase in bearishness, when you consider that we are still very close to an important support level, it is disappointing to see so many optimists.

The Investor’s Intelligence sentiment, which measures newsletter editor’s sentiment, was hardly changed with 31.9% bulls and 46.1% bears. While contrarians may not like the fact that there has been a mad dash away from extreme pessimism in these sentiment gauges, there is another more lenient interpretation. According to Gray and Burke, the duo that reads and categorizes each newsletter editor as bullish, bearish or neutral for ChartCraft, the fact that we saw such a move may be normal. Previous market lows have seen such a shift as bulls increase over time as the market recovers.

ISE Sentiment
On Wednesday, when we stood at the precipice, looking down and the abyss looked back at us, the ISE sentiment data shows that we finally got some semblance of fear from retail options traders. On November 12th, 2008 the ISEE sentiment index (all data) reached 67 - which is on point above where the ISE ratio was on September 19th, 2008 when the S&P 500 Index was at 1255.

This historically useful contrarian indicator may be returning to its usual pattern. But frankly, I’m growing impatient as along with the rest of the options market, it has been acting crazy during this latest market decline. Since I prefer using the equity only data for the CBOE options data, I looked at the same for the ISE options data and came away with an interesting observation. For some reason, during the past six months, the data is within a much narrower range than before:

I’m not sure what to make of this but there it is. I’m sure brighter minds out there will see the significance and perhaps decide to share their insight.

But just so there is no confusion, the low I mentioned before (67) on Wednesday was for all data (equity, ETF and indices options), not just the equity data.

Another horrible day on Wall Street with pretty much the whole screen in red. Fear and loathing is getting thick. The only redeeming characteristic of the market is that we are seeing technical signals of extreme oversold all over the place:

Option Traders
ISEE Sentiment Index reached 60 - meaning for every 100 puts, 60 calls were purchased by retail traders. The last time it was in this range was in March 2007 and August 2007.

The CBOE (equity only) put call ratio almost reached the magical 1.0 level again - the second time this week. Both of these indicators are showing a lot of fear in the options market, especially from retail traders. Which is great from a contrarian perspective.

Volatility
Until today, the VIX index had been surprisingly muted. Not any more. It spiked 17% to almost 29. And more importantly, relative to its moving average it is now within reach of an extreme high that has marked previous market troughs. But as Bill (the expert on the VIX) explains, we can certainly bottom without any sort of spike in volatility.

Market Internals
On the big board, there were 2,694 declining stocks and only 475 advancing ones. Likewise, declining volume surged to 1,957,006,000 while advancing volume was only 206,905,000. Things were similarly bleak on the Nasdaq.

My guess is we just had another another 90-90 (Lowry’s) down day. The previous one was January 11th 2008. Back to back 90-90 down days are normal. What we need next is a decisive 90-90 up day now.

Market Breadth
Wherever I look, there are indicators of a very oversold market. The bullish percent charts of the Nasdaq, NYSE and the S&P 500 are showing either 52 week lows or multi-year lows:

Likewise, the charts of indices for the percentage of stocks above moving averages are at extreme lows. For example: less than 11% of S&P 500 stocks are above their 50 day moving average. And less than 20% above their 200 day moving average.

Same thing for the new high-new low index for various markets. It can always get even more critical but right now, that looks unlikely since most breadth indicators are hugging the redline extremes.

Capitulation
Finally, we’ve had a famous bull throw in the towel. Dan Sullivan, a newsletter writer and a veteran of the markets has liquidated his holdings and gone 100% cash. Usually a significant market bottom doesn’t arrive until it shakes out all but the most resolute bulls.

Considering everything, I just can’t see how this is the beginning of a bear market. Usually they are accompanied by euphoria, good news and smooth sailing but now we are seeing crisis after crisis, panic, fear and loathing. Just the sort of thing that builds a wall of worry… which a bull market climbs.