Trader’s Narrative

With the impending FOMC decision, traders are going to be twitchy and nervous. Although a 25 basis point cut is baked in, until we get confirmation, the market will probably not trend.

If you’ve been reading the blog for the past few weeks, you’re no stranger to my repeated bullish commentary. The market seems to have bottomed right on time with the Nasdaq composite sitting +150 points higher now.

So lets see what the last week brought us in terms of sentiment data:

AAII Sentiment Survey
With the market powering ahead last week with back to back up days, sentiment has shifted. The AAII respondents are neck and neck with 41% bullish and 40% bearish.

Put Call Ratio
The options sentiment ratio spiked up to almost 1.0 in mid November as people rushed to buy puts. But now the equity put call ratio has fallen by almost half. This isn’t automatically a negative as the market has recovered and forced people to back down from their gloom & doom forecasts.

Nasdaq to NYSE Volume Ratio
Although I haven’t said much (or anything really) about this sentiment gauge, it is one of the oldest ones around. The theory is that the two exchanges represent different kinds of equity - Nasdaq was once the platform for unproven, young, and therefore, riskier listings and the big board, the place where all companies wanted to graduate to, the place where the largest, most stable corporations called home.

Of course, over time the difference between the two exchanges has been pretty much eliminated. But this indicator is still going on strong. So by following the ratio of volume on the two exchanges, we can gauge the level at which investors seek risk.

A spike lower in the ratio means that investors are fleeing Nasdaq stocks for NYSE ones and a spike up, the reverse. The most recent market decline in mid November saw this ratio dip to 1.20 - not the lowest it has been, but still very close to the 1.0 level which is the “uncle” point.

More importantly, with the exception of the spike low in November, the ratio has been scraping the ceiling. We’d have to go back more than 6 years to find similarly high readings.