Trader’s Narrative

We stared into the abyss and staring back at us was this week’s sentiment overview:

Investor’s Intelligence
I mentioned in last week’s sentiment overview the surprising bearishness of newsletter writers as measured by Chartcraft. This week they have outdone themselves with an eye popping 44.7% bearish level.

To find this sentiment equally or more pessimistic, we’d have to go all the way back… are you ready? to 1998.

Which, if you are old enough to remember (or agile enough to look up) was a time of unprecedented market turmoil brought on by a gaggle of PhD’s from Chicago running a little hedge fund called Long Term Capital Management. Back then, the II bears reached 50%.

Hulbert Newsletters Sentiment
According to Mark Hulbert, the stock market newsletters with the best long term track record are much more bullish compared to those with a track record worse than buy and hold. They in turn are suggesting being short this market. So which side do you want to be on? Of course, a track record doesn’t guarantee anything except experience. But considering the dearth of other measures which point to a bottoming process, it isn’t too hard to see this as another corroborating indicator.

Optionland
The CBOE equity only put call ratio has backed off its spike high - reached earlier this month. This is normal behavior for this indicator as the market now tries to pull itself up by the britches.

The ISE Sentiment index on the other hand, never really reached extreme levels during last week’s close call with the January bottom. To be honest, I had been watching it in case it did because that would have signaled that the retain option traders were giving up any hope of a bounce off those levels.

Magazine Cover
Here is the current Economist magazine cover:

Although it is decidedly negative, I don’t think it reflects anything more than what is really going on on Wall St. right now.

Subdued VIX
Although volatility, as defined by price movement in either direction, has been truly volatile, the VIX has refused to pierce 36 as it has in the past instances of market declines.

Part of me would like to see the VIX spike to crazy levels but I also have to remind myself that not all market bottoms are alike. As they say, the past rhymes, it doesn’t repeat.

So while it would be nice to have this yet another indicator among the myriad we already have, it isn’t really necessary. And perhaps there are structural reasons for this that will persist even after this current turmoil.

Repo Market Failures
There was such a mad dash for safety that the repo market seized up after record failures to deliver collateral - US government treasuries. Rates also scraped the bottom of the barrel at 0.38%! And I thought the rates a few days ago at 0.92% were low.

I mentioned that the Fed is still way behind the curve (even after the recent rate cut). This is illustrated by the gap between the 3 month Treasury Bill and the Fed Funds rate. As well, so far this year, the general collateral rate (rate for borrowing/lending US Treasuries) has been on averaged 63 basis points lower than the Fed’s overnight target rate. That is in comparison to only 8 basis points in past decade.

See my point now? There is no doubt that the Fed has exacerbated this situation by refusing to get ahead of the repo/bond market.

Amid all the wailing and gnashing of teeth, we had a successful IPO: Visa (V) went public yesterday and made history.

Not only was it a resounding success for the investment bankers in a very difficult time, it was also the biggest IPO ever at $18 billion. And it managed to jump +30% from its $44 per share pricing.

But perhaps it was because of the financial and credit market turmoil that Visa did so well. Unlike many financial companies it carries no consumer debt but instead relies on small commissions on transactions.

Leadership
Each bull market has its leaders. A few years ago, Google (GOOG) and Baidu (BIDU) debuted on the stock exchange and quickly became the darling of momentum investors. Now they both lie broken, not only below their long term moving averages but also with the sword of Democles” (overhead resistance) hanging persistently above price.

So, if we are in the painful process of putting in another bottom here, as I’ve endlessly argued for the past little while, it is wise to look for the next leadership that will breath new life into the “new” bull market.

If Visa does as well as its competitor, MasterCard (MA), I’ll be a happy camper.

IPO Market? What IPO Market?
So far this year, we’ve had only 22 IPOS. Last year, by this time, we had 47. That is a greater than 50% drop off in activity.

If you’ll recall, the IPO market has predictive abilities.

The other way that the IPO market can help us time the market, or at least understand where we are in terms of market cycles, is by being a contrarian indicator of sorts. A bountiful harvest of IPOs has almost always preceded dramatic and sustained market downturns while a barren IPO market has historically meant the opposite.

Like other times of inflection in the stock market, we are seeing technical studies and indicators light up like a Christmas tree. So why not throw another couple stats on the pile? Below are the charts of new 52 week lows for the Nasdaq and the NYSE.

Similar to other indicators I’ve mentioned recently, this one spiked to a multi-year high last Tuesday (January 22nd 2008). In fact, you’d have to go back to the market turmoil we saw in 1998 to find a higher number of new lows!

The NYSE graph looks different mainly because a significant portion of the securities traded there are non-common stock but rather bonds, municipal bond funds and structured funds which are sensitive to interest rates. Nevertheless, we can see the same pattern.

As with the weight of all the indicators that I’ve looked at, this one is saying that it is time to look for buying opportunities, rather than selling or selling short.