Trader’s Narrative

This past week we didn’t really see any significant change in the usual sentiment measures:

LowRisk.com, which was showing a very lopsided bearish opinion (59%) mellowed out as some bears moved over to the neutral camp, reducing their numbers to 44%. Meanwhile, the bulls remained almost unchanged (38%).

Even less change happened in the Investor’s Intelligence survey with neither bulls (41.6%) and bears (32.6%) really budging from last week.

The Consensus survey continued to drop this week reaching 25%. We haven’t seen this measure this low since the summer and winter of 2004. Just a few weeks ago Consensus bullishness was at 47%.

For those unfamiliar with this survey, a little background: Consensus aggregates the sentiment and recommendation of several hundred analysts and independent advisory services. If I don’t mention it, you can find it each week buried in the bowels of Barron’s.

Although it is now at a multi-year low, during the aftermath of the 9/11 terrorist attacks it reached as low as 10%. I don’t think it is fair though to ask that it plumb those depths again in anything but extraordinary market circumstances.

The CBOE equity only put/call ratio back off the Tuesday (February 5th, 2008) high of 0.95 to finish the week at just below 0.80 - elevated levels of concern but not really panic.

The only other noteworthy event is the position of the retail futures traders. But this isn’t really a sentiment measure so much since they have already “put money where their mouth is”. I’ll go into the details for it on Monday. See you then.

LowRisk is probably one of the least known and followed investor sentiment surveys.

It is a bit of a mystery how large the sample size is because Jeff Walker, the person who runs it, won’t disclose how many respondents he gets or has gotten historically. In any case, all we can do is take the data and see if it provides an edge or not.

Every week, anyone with a computer and internet access can fill out a simple question:

How do you think the DJIA will perform in the next 30 days?

• Up 2% or more
• Flat (less than 2% up or down)
• Down 2% or more

There’s also another metric where they ask you to “guess the Dow”. LowRisk has been collected non-stop since 1997 and has proven to be a good contrarian measure.

Which is why it is notable that for this week it flipped from a neutral reading to a very bullish one. Right before the recent market swoon (June 3rd 2007), LowRisk showed 40% bulls and 34% bears.

But on June 10th 2007, there were 14% bulls and 60% bears.

That is very extreme. Even for LowRisk which is one of the most volatile sentiment surveys. In fact, there were only a handful of times in the past with such few bulls:

March 27 2005 —- 14.50%
July 25 2004 —- 14.30%
August 21 2005 —- 12.10%
April 18 1999 —- 12.00%
October 17 2004 —– 10.50%
September 19 1999 —- 10.30%
September 9 2001 —- 10.30%

During those past instances it did a spotty job of pinpointing great buying opportunities. Almost all of those dates correspond to a small bounce, but they were usually followed by a much better buying opportunity (lower bottom) in the immediate future.

There is another way we can slice and dice the data. Lets look at the bull ratio: bulls divided by the bulls plus the bears. This way we compare the two extremes and take out the neutral bystanders.

By that measure, the latest bull ratio of 18.9% is also one of the lowest historical instances. Here are the other times that the bull ratio was lower than 20%:

September 2 2001 —- 12.20%
September 19 1999 —- 13.84%
October 17 2004 —- 15.35%
August 21 2005 —- 16.64%
April 18 1999 —- 17.65%
March 9 2003 —- 18.06%
March 18 2001 —- 18.20%
September 25 2005 —- 19.37%
March 27 2005 —- 19.46%

As you’ve no doubt noticed, there’s a lot of overlap between the two lists. So what I said above applies to this list as well. The only standout date, because it turned out to be an amazing time to buy, was March 9th 2003. This was the third and final retest of the bear market bottom, just before the lift off to a new bull market.

Now the caveat. This is the most bearish (therefore bullish by contrarian analysis) sentiment measure. But it is just one data point.

Also, as I’ve mentioned before, LowRisk is very skittish and jumpy. Which is why it is usually smoothed with a short term moving average. Right now, its moving average is still in neutral… although with a few more numbers close to this extreme low and we’re going to see even the moving average reach extremes.