Trader’s Narrative

Here is the round up of sentiment data for this week:

Sentiment Surveys
According to the weekly AAII sentiment survey, US retail investors are pretty much split evenly between the bullish and bearish camps. The bulls are at 42% ( that’s a 5% point increase from last week) while the bears are at 40% (4% point decrease from last week).

ChartCraft’s Investor Intelligence measure of stock newsletter editors has taken the bullish mantle from the retail investor’s survey for several weeks now. And it continues this week as well. The latest II poll shows the bulls commanding a 47.8% share of the respondents (down slightly from last week) and the bulls, 24.4%. The simple bear/bull ratio continues to run at about 2:1 - giving contrarians a clear signal.

German ZEW Survey of Investor Confidence
Turning our attention to the other side of the pond, the German ZEW sentiment survey of investor confidence (green line in chart below) came in slighly short of the 60 expectation but still managed to climb to 57.7 - its most bullish level since April 2006. However, the survey’s “current economic” outlook - while slightly off its recent lows - is still mired at historic depths (blue line):

This month’s survey results mark one of the few times in the history of this statistic where there is a large mismatch between the two measures. While the current economic situation is still deemed to be very poor, confidence in the future is very high. This should be familiar as it is the same tune that everyone is humming in the US markets. The question then is what happens if the rosy expectations of the future do not come about?

Option Traders
Both the CBOE put call ratio and the ISEE index are showing an excessive bullishness. This should be normal but since they have disagreed with one another so much, it made me sit up and take notice.

The CBOE put call ratio (equity only) dropped to a low of 0.45 earlier in the week (Wednesday - September 16th, 2009). That’s a lot of call buying! The short term moving average of the daily put call ratio continued to decline as it has for the past few months. It is already below its long term channel so it is difficult to determine what if any sort of signal it is giving now.

The ISEE index (equity only) meanwhile jumped to 242 on Wednesday’s long range candlestick. That means for every 100 puts, 242 calls were bought (to initiate a position). To find a more bullish one day statistic, we’d have to hop into our time machine and travel back to November 6th, 2007 when the ISEE index hit 245. At that time the S&P 500 was trading around the 1500 level. More important than just the one day spike, the 10 day moving average for the ISEE is now also significantly high as shown on the chart below:
Continue reading ‘Sentiment Overview: Week Of September 18th, 2009′

It looks like the worst may be over for the stock market. And while a ‘double dip’ may be just around the corner, for now it looks like retail investors are once more ready to take on risk. But are they actually ready to bet on higher stock market levels or are they simply trying to be opportunistic?

A recent article in the Wall Street Journal explored this question.

August is usually a slow month for both retailers and institutions with a 10% expected average drop in volume. But this past August brought with it an abnormal increase in trading volume. The majority of online brokers had increases of 14% to 18% in daily transactions. As well, the aggregate daily trading volume for Schwab (SCHW), TD Ameritrade (TD) and E-Trade (ETFC) show a robust increase not only from the past month but also compared to the past year (see left chart).

While there is still a massive pile of cash sitting on the sidelines, we aren’t seeing it being funneled to the equity market aggressively by mutual fund buyers. They continue to send the majority of their money to ’safer’ bond funds by a 20 to 1 margin (in August equity funds took in about $2 billion while bond funds absorbed $40 billion).

Gauging daily trading volume across online brokers is one method to measure retail investor mood. I use another which is much easily available and one which I’ve dubbed the Sheeple Index. It is a measure of the traffic activity for the websites of major online brokers. The logic is that we can see the footprint of the retail investors as they log on to make trades.

It isn’t a perfect indicator. For one, there is an inherent seasonality to internet traffic, much like the stock market’s volume which wanes in the summer. But it is a good enough metric because while there are still a tiny, sliver of a percentage of people who place trades over the phone, nowadays, the vast majority of people (including grandparents) are using the internet. As well, the traffic for the brokers which I measure are used by retail traders primarily. I ignore those preferred by more active or professional traders.

Having said that, there is no accurate way to measure the traffic of a website other than having direct access to its logs. There are a few third party sites which have taken different approaches to try and approximate this data but they each have their own weaknesses. As well, it must be noted that even if we could somehow measure the activity accurately, we would still have no way to know if what we are seeing is new money being put to work or just ‘churning’ in the account.

Below, I’ve shown several graphs of website traffic for online brokers. I’ve kept the colors consistent across the different graphs so they are easy to compare. The first is from Compete.com:
Continue reading ‘Are Retail Investors Really Coming Back?’

Here is the sentiment overview for the last week of the month (in terms of returns, the worst January ever!):

AAII
The American Association of Individual Investors’ weekly sentiment survey had 47% of respondents bearish and only 25% bullish. That may seem like good odds for a rally… except that we’ve been hereabouts before (in late 2008) and yet the market weakness continued.

Investor’s Intelligence
This week’s II sentiment survey shows the bears at 38% and the bulls at 34.8%. This is a continued amelioration of the exuberance that we’ve seen for the past several weeks, but it still leaves the two camps, more or less, equal to one another.

Fund Flows
Yesterday we talked about the lack of IPOs which are in a sense, supply of “paper” to the market. On the other side stands the fund flows which measure the demand for equities through the purchase or sale of mutual funds.

Not surprisingly, mutual funds have undergone a scorched earth scenario where for more than a year, we’ve hardly seen net inflows:

Source: Data by AMG Data and chart by SentimenTrader.com

Although this data has a contrarian tinge to it, there is nothing bullish about seeing a continuous erosion of mutual fund flows. A sudden and sharp decline is far different than what we are seeing now. Eventually, for the market to be able to find its legs again and push forward, we will need to see people willing to pour billions and billions of dollars into new mutual fund purchases.

Options Sentiment
Neither the CBOE put call ratio or the ISEE call put sentiment ratio are significantly different from last week’s sentiment overview.

I was busy on Friday and couldn’t post this at the usual time. Here is the weekly sentiment roundup:

Sentiment Surveys
Fear gripped the respondents to the AAII survey last week as bullishness plunged to 26% (from a recent high of 47.62%) and the bears, meanwhile, catapulted to 55%. Whenever we’ve seen this much bearishness, it has been a good time to buy. Click here to see a chart of what the S&P 500 does historically after similar AAII readings.

Surprisingly, the Investor’s Intelligence survey (which is one person’s judgment on the sentiment of newsletter writers) shows the opposite: 52.2% bullish and only 24.5% bearish. Personally, I’d rather go with the gauge that relies on the response of thousands (instead of one). Especially as the other sentiment indicators dove tail it so well.

(Mutual) Fund Flows
Data from TrimTabs corroborates the shocking hemorrhage in the mutual fund industry I wrote about before. According to them, 2007 saw probably the largest outflow in history.

I still have no idea what is going on here. And it is a bit strange that no one is really talking about this in the media. It does fit in with the retail investor’s sentiment and from a contrarian point of view, it is very bullish. Take a look at this graph sent in by a reader. It puts this into historical context:

Click to Enlarge

Option Traders
Last week, before the market sold off, I wrote a cautionary post: Retail Option Traders Tad Too Giddy. And right on cue we saw the result of that “giddiness”.

Option traders have backed off, a bit. The CBOE put/call ratio is now almost 0.7. And the retail traders, as measured by the ISE Index, dropped from 168 to 93. These are not “buy zone” levels but as the market digests the loss over the weekend, I think we will see an expansion of the panic that seems to have started - which will provide those levels.

Insider Buying
The legal kind, is off the charts. According to various sources that track what corporate insiders are doing, they are scooping up shares hand over fist. They’ve been on a buying spree pretty much since last summer and have never become net sellers (yet).

Commitment of Traders
The commercial players in the futures market (the most well funded and knowledgeable of the bunch) have significantly stepped back from the record COT net long position they had last summer. The best I can say is that things aren’t as wildly bullish as then. But they are somewhere near the middle - no where near net short.