Trader’s Narrative

The National Federation of Independent Business (NFIB) Small Business Optimism Index fell 2.6 points to 85.2 in December 2008:

This is an aggregate measure of 10 indicators: outlook for expansion, earnings, sales, and hiring. Amazingly, the net percentage of small business owners planning to hire is -6%. That scrapes the bottom of the barrel and is analogous to the recession we saw back in the 1970’s (not shown on graph).

Small businesses are often been touted as the engine of the US economy. From this survey it is obvious that the engine is flat out junked. These numbers are as bad as we’ve ever seen them in modern history.

The NFIB survey complements the other sentiment readings we’ve been getting from other sources such as the Conference Board Consumer Confidence and the State Street Investor Confidence Index.

You can get more information and download the full report at the NFIB site.

Everything seemed to be going alright and then GE came along and whacked the markets with their largest earnings miss in at least three years.

Any way you cut it, Friday was a horrible day (for the bulls). There were 2440 issues declining on the NYSE (out of 3211) and on the Nasdaq, 2,290 fell out of 3,037 traded. Advancing volume was dwarfed by declining volume - 9:1 on the NYSE and 6:1 on the Nasdaq.

Of course, I don’t think that GE is the real cause of the market’s fall but it is a comfortable excuse for most. I outlined my hesitation that the market was approaching resistance levels and that the odd lot short sales were too high to give me reason to believe that the rally would continue.

Surveys
According to Investor’s Intelligence, newsletter editors are for the most part unchanged in their view of the market. Meanwhile, the AAII sentiment has now recovered that it is slowly approaching just a tad too much optimism: 46% bullish, 37% bearish.

The same can more or less be said for the other sentiment measures: LowRisk, Consensus, and MarketVane, so I won’t bore you with their mundane details.

Put Call Ratios
The decline wasn’t enough to push the CBOE put call ratio to parity. It climbed to just barely below 0.90 - below levels which we would associate with panic:

Before Friday’s thrashing, the small option traders as measured by the proprietary ROBO ratio had actually increased their pessimism despite the market’s recent rise. I always take notice whenever sentiment goes in the opposite direction of the market it is tracking. But again, this was before GE threw a monkey wrench into the works.

NFIB Sentiment
The National Federation of Independent Business (NFIB) is reporting that small business sentiment in the US is at an historic low. They have collected information from their small business members for more than twenty years and this most recent response is the gloomiest assessment of business outlook ever.

So it seems that the horrendous consumer sentiment has company.

As you would no doubt surmise, such pessimism is actually good for the market. Whenever we have an excessive level of doom and gloom, the worst is already behind us. I’m referring to the stock market here because while there may be real pressure on consumers and small businesses, the stock market is a forward discounting mechanism.

And because it looks forward while other indicators measure the past or present, it can seem to be paradoxically the opposite of the real economy.