Trader’s Narrative

The last time I revisited the Chinese stock market, it was in the throes of a major bear market. Fast forwarding to now shows things have only intensified with the Shanghai composite trading at less than half of its top in October 2007:

While we quibble about a percentage point here and there to see if our market decline fits into the classic definition of a bear market, there are no qualms regarding that in China.

Support?
The scary thing is that even after falling so much, the index is still far from major support areas. If you look at the link above, you’ll see a long term chart of the Shanghai composite going back to its founding. According to that chart, significant support is somewhere in the vicinity of the 2000 level. That would put a potential fall to almost 70%!

I have no idea if that will happen but the Chinese stock market certainly has precedent. It is not for the faint of heart. The Shanghai Composite can go ballistic: rising as it going ten fold in the span of a year (1991-1992) but it can also lapse into deep stagnation, as it did from 2000 to 2007, treading sideways.

Dire Portents
But what interests me more is the portent of such a dramatic decline for the price of crude oil. From what I read, China holds significant responsibility for the current price of oil because of its voracious appetite. But if the stock market is a forward discounting mechanism, that means that the Chinese economy is about to decelerate or even go into a tailspin.

The corollary of that is lower demand for oil and, if I remember Economics 101 correctly, that would mean a lower oil price - all things being equal.

Rundown of the usual and unusual sentiment measures for this most interesting trading week:

Hulbert Stock Newsletter Sentiment
The HSNSI measures the average stock market exposure among a subset of short-term market timing newsletters. As of yesterday’s close it reached -11.3%. Last week it was +8.6% when I pointed out that although that was low, usually we need to dip into negative territory. Its historic range extends from +79.7% to -81.8%. But the really negative stuff is for bear market bottoms.

Investor’s Intelligence
II’s bearishness has increased precipitously as the market has fallen. As the market topped they numbered around 22% but now they are 32.6%. That may not seem like a high number but relative to previous II readings, this is close to reaching its extreme. The bulls have likewise dropped from around 55% to 43.8%.

AAII
Puzzlingly the retail investors at the AAII have been very reluctant to become defensive. This week they finally inched their way into the bear side with 46% bears and 42% bulls. Although they’re going in the right direction, reducing bullishness by 4% points and increasing bearishness by 7% points, they haven’t really responded in the usual skittish way.

Market Vane
After I wrote about Market Vane last week, a reader pointed out that it may not be contrarian after all. They mentioned that in the past MV becomes bearish just as a major bear market or crash is about to occur. I’ve looked over the historical chart and I can’t really see this. Plus, they’ve already incrementally decreased their bearishness (by 2% points to 58%). So I’m still regarding this through a contrarian lense and see it as a bullish omen.

ISEE Call Put Ratio
As I pointed out although the ISE call put ratio didn’t reach a daily extreme reading, the ISEE index’s 10 day moving average did fall to historic lows seen only twice before. Things have been a bit wonky with the ISE and eventhough I’m pretty sure this data is accurate my trust has been eroded by their inexcusable lack of transparency and communication about their error.

CBOE Put Call Ratio
The traditional put call ratio (CBOE equity only) spent three days above 1.0 this week: Tuesday 1.08, Wednesday 1.05, Thursday 1.02 This is highly unusual and indicative of sustained fear. Obviously after today’s strong showing it declined to 0.75.

Conclusion
Although sentiment didn’t or hasn’t reached the kinds of extreme’s that I’d like to see at a significant market bottom, there is no question that we have pervasive bearishness out there. Here’s what appeared on the front page of digg this morning:

It linked to an article at Slate.com which in fact didn’t say anything remotely similar to the headline on digg. Nevertheless, it was dugg and made it to the front page. Perfect unorthodox contrarian indicator.

Did you find any other ones?