Trader’s Narrative

Arguably, the biggest chink in the armour for bulls is the lack of extreme bearishness in sentiment that would give way to an outright capitulation by sellers. When I listed the 12 Reasons Why This Is A Buying Opportunity two days ago, sentiment survey results hadn’t really come in yet.

They’re now in and we can take a look at how market participants reacted to the decline. (I already covered LowRisk, so I’ll skip to the others.)

Investor’s Intelligence
The recent II results show 47.2% newsletters as bullish, down 6.7% points, and 26.4% newsletters bearish, up +8.4% points. That’s the direction that I’d like to see sentiment heading in. But the degree to which newsletters gave up their bullishness is still not enough to cause a wide enough swing to take us to a contrarian bullish level. While just before the market tumble, it was way too bullish, II is now, at best, mired in neutral territory. So it isn’t much of a help. Except to show that we still don’t have capitulation.

AAII
The AAII survey is equally lukewarm. Bears increased by 3% points to 40% and bulls increased by 2% points to 46%. The bull ratio hardly budged. Not at all the sort of sentiment reaction I was expecting. Especially with the plethora of negative headlines and news reports about the market and its scapegoat, the subprime mortgage market.

ISE Sentiment
In early March 2007, we got a cluster of 3 back to back readings in the 60’s. Meaning that approximately 60 some odd calls were purchases for every put on the ISE. Right now, we’ve only dipped to 78. And today, eventhough the market closed very weak, the ISE Sentiment Index jumped 25 points to 103 - so as the market went down, ISE traders purchased more calls. That’s not capitulation. That’s stubborn bullishness. And frankly, it punches holes into the bullish case.

Put Call Ratio
Similar to the ISE Sentiment index, the put call ratio oddly shows a dangerous amount of complacency. Even as the market sliced through its support area this afternoon, I can find no real rush to buy puts. It seems that traders are comfortable with the declines. And if there’s anything that should send shivers down the backs of bulls, it is that.

I’m actually a bit confused about this because the last time I checked in on the put call indicator, it was showing an extreme spike. But now, it seems that it was an error, either from the exchange or the datafeed provider. In any case, eventhough the put call ratio is in the “green” zone, it still hasn’t shown the kind of whoosh I’d like to see (the kind that gives investors reason to change their pants).

Conclusion
One, I better start double checking my data! Two, we do not have capitulation from these sentiment indicators. As long as they show a comfortable and complacent market, the probability of a continuing decline increases.