Trader’s Narrative

Let’s take a quick look-see at the sentiment for this past week:

ISEE Sentiment Index has backed off the low extremes considerably and hit 125 - so retail option traders are buying slightly more calls than puts. This is to be expected and unless we see this indicator reaching +200 the rally shouldn’t be in danger.

Short interest ratio is the number of shares of stock sold short compared to the average daily volume. On the NYSE, this ratio is close to 9. By itself this would be astonishing because it is the highest ratio in history. But there is more going on than simply rampant shorting of stocks. A new structured fund product has taken off on Wall Street, sucking in billions of dollars to a long/short strategy.

The AAII sentiment has ameliorated slightly with just 49% of retail investors feeling bearish this week. But still only 30% are bullish, leaving us with quite a bit of left over panic.

LowRisk’s 30 day outlook continues to be mired in absolute dejection: 59% bearish and 36% bullish. The remarkable thing is not only the degree of bearishness but that there are so few fence sitters (only 5% are neutral).

The troublesome Investor’s Intelligence sentiment continues to back off its bearish signal of the last few weeks. This week bulls are only 40% - a level we reach at intermediate market bottoms. The past few times we got this low were: summer 2004, summer 2006 and August 2007. Having said that, we still are not seeing any sort of panic in newsletter-land.

The Hulbert Stock Newsletter Sentiment index is mirroring the II picture with only an average of +10.1% exposure recommended by stock market timing newsletters. Seeing how the historical maximum is +79.7% and the minimum is -81.8%, things are decidedly lukewarm. But Mark Hulbert, keeper of the HSNSI interprets the concomitant rise in bullish sentiment with market prices to mean that the rally is hollow and bound to retest the recent lows.

Recent Yahoo! (YHOO) holders are all too familiar with a retest of lows. That is, before this morning’s surprise announcement from Microsoft (MSFT) regarding their amorous intentions. If you were holding YHOO, I hope you took at least some money off the table.

UPDATE: Its been a while since I mentioned the TickerSense blogger sentiment poll but I just noticed that the bulls are at only 24% while the bears are at 44%. This is the highest disparity between the two camps since March 12th, 2007 when bloggers were 13.16% bullish and 42.11% bearish.

I’m a bit wary of giving this too much weight because of the edgeless nature of this particular sentiment indicator. But if you notice, there’s been a remarkable switch since last August: bulls have been more predominant than bears. So now, after months and months, we see the bulls finally capitulating. There may be something in that pattern.