Trader’s Narrative

Here is this week’s roundup of sentiment data for the stock market:

Sentiment Surveys
AAII slight increase in the bullish camp and an 11% decrease in the bearish camp to bring both to 38% with 24% left over as neutral. That leaves us with no real edge, again.

Last month I mentioned in this sentiment overview that the AAII asset allocation to bonds was at a historic extreme (at 25% of the portfolio). The new AAII asset allocation for bonds is 17%, down 8% points, which is still a tad on the high end but no longer extreme. The equity allocation notched up slightly to 54% and cash to 29%.

The Investors Intelligence sentiment data for this week twitched slightly but we have more or less the same picture as before. The bulls declines slightly to 50.6% and the bears increased from their historic low to a more normal 24.1%. Of course, the bulls continue to dominate and the bull to bear ratio is once again above 2.

The Daily Sentiment Index from Jake Bernstein continues to show a rather frothy mood on the street. This week it was still at the elevated levels from last week (88%) while the Nasdaq futures traders were equally optimistic at 87%:

Citigroup Economic Surprise Index
Unemployment inched closer to 10% with today’s announcement of 216,000 jobs lost in August. But it is rarely the data itself that is important. Much more important is how it is interpreted and how the market reacts to it. And believe it or not, there is an index for that. The Citigroup Economic Surprise index measures whether economic data are better or worse than expectations.

When we have a streak of really good economic news, being human, we become acclimated to this new environment and come to expect further good news, discounting what once might have been actually very good news. Of course, a streak can’t continue forever and we become ‘disappointed’ by less than stellar news. In any case, right now the Citigroup Economic Surprise index is at its highest historical range. This means it is more and more difficult to wow the market with good news. Not surprisingly, in the past this has accompanied market tops.

Volatility
Volatility, as measured by the CBOE VIX index continues to be mired in the ~25 range which is the new support (previously resistance in 207 and 2008). Either a decisive break to the 20 range or higher to break the declining trend (above 30) would make me sit up and take notice. Until then it is boring me.

Reverse Stock Splits
Thanks to this brutal bear market we have heaps of previously well to do stocks which are now trading below $5. That is a significant line in the sand because most institutional managers have a mandate to only touch equities above that threshold. This is to protect investors from speculative issues like penny stocks. Rather than let their stocks scrape the bottom of the exchange, most corporations fall back on a sleight of hand trick called reverse stock splits to magically raise themselves above that institutional $5 level.

While it may seem to be a transparent trick, you may think it would be lucrative because it would allow institutions to once again have access to the stock in question. However, a recent study from Credit Suisse by Sveinn Palsson shows that since 1980, a reverse stock split does not raise the stock’s price. Instead, the median one month return after the corporate action is actually negative.

Today previous stalwarts are lining up to file reverse splits with the SEC. AIG did one in July. Citigroup filed just recently. And the list of sub $5 stocks goes around the block: CIT Group (CIT), E-Trade (ETFC), Huntington Bancshares (HBAN), Regions Financial (RF), Keycorp (KEY), etc.

Party Like It’s 1999
Here is a funny anecdotal sentiment observation. The design to the left is for a t-shirt website called threadless. This is a site where anyone can submit an original design and based on the votes it garners the staff pick about 10 designs every week.

In any case, this design is the ’sign of the horns’ - an ancient hand gesture which has different meanings depending on the era, location and culture. But basically, in this context, it is about exuberance, to put it politely. And it is mounted on top of the iconic Wall Street bull statue instead of its head. Somebody is partying like its 1999.

Hmm… that reminds me, where was it I saw trading t-shirts?

A lot of must read stuff on news.tradersnarrative.com so be sure to check it out!

Here is a small sample - I especially recommend the “How to Fix the Mortgage Business” article. It offers a very simple and non-invasive way to realign risk with return to help the market help itself.

Oh and don’t forget to enter the caption contest and win yourself a t-shirt.

A lot of interesting stuff on news.tradersnarrative.com be sure to check it out!

Also, don’t forget to enter the caption contest and win yourself a t-shirt.

Here is a little taste, with more being added:

In light of everything going on, lets have some chuckles:

Think you can do better?

Come up with a funnier caption for the above picture and win this trading T-Shirt:

Carpenters do it with big wood. Doctors do it while you turn your head and cough. Teachers do it with yard sticks. Lawyers do it in front of a jury of their peers. Traders do it….

Drop your wit in the comments below. No kiddin’.

Make sure to leave your correct email so I can get in touch with you for mailing and size info.

I just traded the shirt you see on the left for the DVD of Shogun Assassin as part of Ugly’s Blue Paperclip project. His goal is to trade his way to a share of Berkshire Hathaway.

It was my pleasure to be part of Ugly’s quest, especially as his blog is so enjoyable and educational. I look forward to receiving the DVD and watching it with my brother. Eventhough he doesn’t have the time to practice much now, he is a black belt in Kung Fu so I think he’ll really enjoy Shogun.

This is your chance to trade something with Ugly and get this sweet t-shirt in return. The street value of the t-shirt is around $25 US. But after Ugly wears it, the t-shirt will be endowed with his trading pheromones, and as a result, more than triple in value by my estimates. So get a move on before someone else gets it first.