Trader’s Narrative

Here is the sentiment overview for this Easter shortened trading week:

AAII Sentiment
This week’s sentiment survey from the American Association of Individual Investors shows 44% bears and 36% bulls. That’s a 7 percentage point change from last week for both camps (a decrease for bulls and an increase for bears).

This is a welcome development because although the market (S&P 500) closed the week higher than it started, sentiment is actually less hopeful than it was. This is just one glimmer of contrarian sentiment and it is a shallow change (at only 7%) but still it is valid. At this point, we’ll take what we can.

Investors Intelligence
In contrast, the survey of newsletter editors conducted by ChartCraft shows little change from last week. Tuesday’s results show 36% bulls and 37.1% bears - putting the two sides equally at odds. In early March, we saw a somewhat polarized sentiment. But as the rally unfolded, both the optimists and pessimists have been slowly approaching each other.

Howard Ruff
The 25% rally this past month has brought out the experts. And for the most part they are now back to their talking points. Take for example, Howard Ruff. He’s decidedly bearish as usual and saying that the recent move is just a bear market rally. He’s looking for hyperinflation and a “toxic” stock market for the foreseeable future.

On the other hand, the spasmodic Jim Cramer has declared the “the depression is over”. Never mind that it was just a few months ago that he asked people to leave the market for the next 5 years. And even shorter still when he promised by a gentleman’s handshake that Mad Money will feature a more rational host. The worst is over! And it is time to become a roaring bull (again). Cue the soundboard. Increase the props department’s budget!

The lesson here is to recognize the inherent bias in every source and to recalibrate what they say based on that. There are very, very few who are as easily bears as bulls and rather than swayed by a bias, rely on evidence based market analysis.

Rydex Traders
Two weeks ago, I mentioned in a similar sentiment overview that the itchy triggered Rydex traders have stampeded to the bull’s side. To put it bluntly, these traders are too excited for their own good and are positioned as they were at previous tops.

ISEE Sentiment
The ISEE sentiment index, which measures retail option traders, showed a consistent level of optimism all throughout this shortened trading week. Although never reaching spike highs (of 200+), the call-put ratio was noteworthy for the elevated plateau it reached. Here are ratios for the equity only ISE sentiment:

• Monday — 169
• Tuesday — 170
• Wednesday — 167
• Thursday — 174

The last time the ISE index spent 4 consecutive days above 167 was late last year, just as the S&P 500 reached a peak in early January 2009.

Follow the link for an update on the CBOE put call ratio (equity only).

Uptick Rule
The SEC is putting out feelers for a change to the rules governing a short sale. It wasn’t that long ago that the uptick rule was removed but there is now a real possibility that either it will be reinstated or some similar protocols will be put in place. From a sentiment perspective, the important thing is what people think about the change. If enough think that it will be a positive, it will be, irrespective of whether it truly is. This is the crazy, self-fulfilling effect that the market can have on itself - in the short term. In the long term, reality always reasserts itself like a wave of ice cold water.

Market Breadth
Persevering readers will remember that we’ve looked at market breadth a number of ways this week. Here’s another: the simple 25 day moving average of the Nasdaq daily advance decline statistics.
Continue reading ‘Sentiment Overview: Week Of April 10th, 2009′

After seeing a 25% rally, the reasons to be cautious continue to pile up:

ISEE Index
The ISE call put ratio, otherwise known as the ISEE index started the week off fairily high. The equity only sub-index came in at 169 on Monday and continued to stay elevated. On Tuesday it was 170 and today it closed at 167.

I’ve found the ISE sentiment tough to decipher during this bear market because of how strange it has acted but the 3 continuous days at 169 and higher show a level of call buying that we haven’t seen since very late last year (Christmas and beyond). That, as you’ll remember, was a very poor time to be bullish on the stock market.

CBOE Put Call Ratio
The more traditional put call ratio - also equities only - shows a similar picture. Here’s a 21 day moving average of the CBOE put-call ratio with the corresponding tops in the market:

Cramer Bullish
Remember Jim Cramer? The guy who was gutted like a fish by Jon Stewart? The guy who went on TV, almost weeping, telling people late last year to take their money out of the market for the next 5 years? Yeah, that guy, he’s bullish again and leading “Cramerica”, once again, to the slaughterhouse. Last Thursday he announced that the “depression” is over and the market has seen the bottom.

Earning Season
With the Alcoa (AA) kicking off earning season, we are now in a market cycle which lasts about a month and which is well known for its weakness. I’m not sure why exactly earning season is a bad time historically to be invested in the market but it is. Numerous studies have shown it to varying degrees. You can stay up to date with this earnings calendar from the Wall St. Journal.

Sentiment
Finally, as I’ve mentioned already in previous sentiment overviews, we’ve seen a general return to optimism through the various sentiment indicators and surveys. Although some of this is to be expected and warranted for a return to normalcy, it is another element we have to throw into the pot.

The sideshow to the dead cat bounce (more like a rocket ride) was the brewing TV feud between The Daily Show and CNBC. If you missed the final show down, check out the link to watch the complete, unedited version. While Stewart rightfully gutted Cramer like a fish, what I wish Stewart had mentioned explicitly is that if you give a platform for analysts, CEOs, etc. to spout off, then you also have the responsibility to fact check, ask tough questions, research, etc. You know, journalism. It is a sign of our upside down world that a comedian is playing the role of a serious journalist while a former hedge fund manager is playing a clown.

That and more, in this week’s reading list at news.tradersnarrative.com:

• Jon Stewart’s secret Wall St. insider connection
• Suppress the Urge to Call the Bottom
• Parabolic Move in Financial Sector
• One Last Bubble Remains to be Popped
• Bear Market Rally… or Real, Lasting Reversal?
• Stocks That Aren’t Coming Back
• Ignoring the Austrians Got Us in This Mess
• Greenspan Tries to Re-write Monetary History
• How Wall St. Bought the Govt & Cut Regulation at the Knees

And remember to check regularly since there are links added regularly throughout the week.

If you missed yesterday’s The Daily Show with Jon Stewart, then do yourself a favor and watch it online. Not only does Jon rip CNBC and Jim Cramer a new one, he devotes a good part of the whole show to the “Decession”.

My American readers can watch the episode here:

Fellow Canadians can watch the episode here.

There is the usual Daily Show edit cuts but the most damning satire is reserved for CNBC’s Carl Quintanilla interviewing Sir Allen Stanford. But more than satirizing CNBC, Stewart asks some incredibly cogent questions like, why are we, in effect, buying the same toxic assets twice?

I stopped watching CNBC, even for entertainment purposes, years ago. When the history of our time is written, I hope they and the general mainstream media get the treatment they so richly deserve.

Does anyone really watch CNBC anymore? seriously? If you do, please tell me what I might be missing. I’m sincerely curious if they have any saving graces at this point.

The worst thing an indicator can do is not to be consistently wrong but to have no edge whatsoever. This is because if it is consistently wrong or almost always wrong, then it can be used as a contrarian indicator. Jim Cramer would be a good example. If on the other hand the indicator is more or less right on the money, then it is a leading indicator. A good example would be the OEX options market.

The TickerSense blogger sentiment poll is useless as a sentiment indicator because it has no edge, it is just random data. Noise. To this useless sentiment indicator, we can add another one: Citigroup’s Panic/Euphoria Model.

This is an proprietary aggregate measure of sentiment from the quants at Citigroup and is published weekly by Barron’s in their sentiment section. If anyone had any doubts as to the value of this indicator from Citigroup, this most recent market upheaval has given them a definitive answer.

Citisnooze
As we suffered one of the sharpest drops in stock market history, as volatility spiked to record highs, as sentiment measured by traditional investor surveys reached epic pessimism, as breadth redlined, the Citigroup’s Panic/Euphoria Model yawned and continued napping:

I’m not sure what goes into the calculation of this number and frankly, I don’t care. Whatever recipe Citigroup Investment Research is using, it is garbage. What I can’t understand is how anyone can continue to come in in the mornings and crunch numbers for this indicator when it is completely separate from reality. Why is a reputable publication like Barron’s legitimizing this drivel by disseminating it every week?

Tweaking Garbage
Although the make up of the indicator is secret, there are some hints that Citigroup has tweaked it in. You can see that in the chart below (from April 28th 2008), the low in March 2008 does not coincide exactly with the same trough in the most recent iteration of the graph above. The low in March was deeper (more “panicky”) and it registered closer to the end of the month while in the most recent data, it is shallower and occurs mid-month.

The problem with tweaking garbage is that even if Citigroup corrects it, the data won’t be historically comparable. Just like TickerSense, the best thing to do is to acknowledge reality and discontinue it.