Trader’s Narrative

Here is the sentiment wrap-up for a week that saw new yearly highs:

Dow 10,000
Yes, the Dow Jones reached and surpassed the magically round number 10,000. But in case you were too busy to count, this is for the 26th time it has done so in the past 10 years. So that means we’ve had about 10 years of zero returns (excluding dividends and inflation). Those specialty party hats the NYSE hands out are well worn by now and no one really knows what we’re supposed to be celebrating.

Sentiment Surveys
Turning out attention to the AAII weekly sentiment survey, we find a large jump in optimism among retail US investors. This week 47% are bullish - a jump of 12% points from last week. In contrast there are 34% bears (a drop of 7% points). Usually this survey gets my attention anytime a particular camp has majority. We’re not there yet, but this is mighty close.

While you will most likely interpret this lopsided survey result to be contrarian bearish, keep in mind that the previous time we saw the bullish ratio this high was a few months ago in July 2009. As the chart shows, the S&P 500 index shrugged off any suggestions of ‘too much optimism’ and barreled ahead gaining 150 points. If I were relying on just the AAII survey, ideally I’d like to wait for the bulls to get to 50% or more before being confident about it tripping up the market.

Investors Intelligence
While the AAII bulls took the reins this week, the weekly survey from ChartCraft measuring the stock newsletter editors sentiment has been dominated by the bulls for a few months now. This week was no exception as the Investors Intelligence indicator came in with 47.2% bulls and only 26.4% bears. So this isn’t all that helpful because while II has been stuck showing about twice as many bulls as bears, the market has continued to rise.

National Federation of Independent Business
The monthly NFIB survey results show September inched ahead at 88.8 - which is pretty unimpressive since it isn’t even higher than the results in May (88.9). As well, 6 of the 10 sub-components were either down or flat suggesting that the tiny improvement came from a narrow contribution.

The details of the NFIB survey show the huge disconnect between Wall St. which has enjoyed a 60% rally and an attitude of ‘back to business as usual’ (with bigger than ever bonuses) and Main St. which is still struggling with a very weak economy. Small US businesses are not ready to build up inventories, nor are they planning on expanding capex spending, nor are they hiring, nor are they expecting credit conditions to ease. Small business in America is referred to as the engine of the economy but it has been neglected while ‘too big to fail’ banks and investment houses become even bigger and received billions of dollars from the government.

Option Traders
The sentiment in the option pits continues to be very very bullish. While some of the penchant for calls can be attributed to the stock replacement strategy, I don’t think that explains enough to discount the alarming extent of the skew.

The ISE sentiment index (equity only) which exclusively measures retail option traders opening transactions spent 4 days out of the 5 trading days in this past week above 200. That was enough to take the 10 day moving average of the equity only call put ratio to 200.8 which is the highest since November 2007. For a chart, see the sentiment overview at the start of the month.

The CBOE (equity only) put call ratio is also showing a similar pattern of excessive call buying. Its 10 day simple moving average is 0.52 which is among the lowest levels for many years. In the following chart, you can see how the S&P 500 has responded when we’ve seen this much optimism:

This is by no means an exhaustive or quantitative study but it does show that while the equity markets can rise a bit in the face of such bullish option sentiment, sooner or later, it catches up with it. Either the market goes sideways or corrects sharply. Hmm… that sounds familiar.

Volatility
As an alert reader pointed out, the CBOE volatility index (VIX) is now scraping a bottom not seen since September 2008. In case you’ve blocked out that painful memory, that was just before the catastrophic waterfall decline which took the S&P 500 index down to a 6 handle. But from all the historical studies that I’ve seen, a low VIX doesn’t really mean anything, not in the way that a spike high denotes a panic bottom for equities. After going through some absolutely insane volatility we are once again returning to historically normal ranges so I don’t think there’s much edge here.

IPO Pipeline
The private equity groups are getting more and more of their holdings gussied up for public offerings. If you know how shrewd an investor these institutions are, you do not want to be on the other side of their average trade. After all, timing the market is pretty much all they do. They fund or take unloved companies private and then when the public sentiment is ripe, they sell them back again for a higher price.

In the following weeks, Fortress, KKR, Blackstone and Bain Capital will be bringing a half a dozen IPOs online. Unlike the traditional IPO where a company raises money for expansion, these are exits where the firms that took an opportunistic stake want to get their money back with a healthy return. Usually a healthy IPO market is a sign of a healthy equity market and only when it become excessive should we take a contrarian stance. But now, I’m watching the number of IPOs and the welcome they receive in the market as a gauge of the mood out there.

For most, the constant flood of real time news can be overwhelming. There are already many sites which aggregate news, categorizing and organizing them into more manageable streams. For the past week I’ve been using an invitation only financial news service called SkyGrid that does this and much more.

Behind the constantly updating headlines delivered by SkyGrid is a sophisticated set of algorithms that not only check for reputation and relevance of the source but also measure the sentiment expressed in the article. SkyGrid then categorizes the news as either red (negative), green (positive) or grey (neutral). So with a glance you can tell what the prevalent news is for a company or sector. Here’s a recent screenshot:

The user interface, with its clear and intuitive layout, is reminiscent of a Bloomberg terminal. You can filter the stream of real time news to blogs, mainstream news sources, EDGAR, etc. You can also add specific sectors as well as do a search for any public company by typing in its name or symbol.

SkyGrid was founded by Kevin Pomplun in 2005 and later attracted VC funding from Draper Fisher Jurvetson, RRE Ventures, BlackRock, and Esther Dyson. Pomplun says that he started Skygrid because “If you looked at the information landscape prior to the Internet, it was manageable. But with the explosion of content you had a fire hose of data that is hard to digest, and people needed a way to filter it.”

Until recently, SkyGrid cost $6000/year (or $500/monthly subscription). Their business model has changed to an advertising supported model, so they are now offering the same product for free. But they are limiting accounts to invitations exclusively. You can request one at their site but who knows how long it will take for them to respond and send you access.

As a gift to my readers, I’ve finagled a limited number of SkyGrid invitations. I would like to ask that as a courtesy, you only take the invitations if you intend to use the service and provide feedback to the SkyGrid team. This is a free service so earn some good karma by sending them an email after you take their baby for a spin (there is a huge feedback button on the top right of the screen once you login).

If this isn’t something you’re interested in, then take a pass or pass it on to someone who is because if the other invitation offers on other blogs is an indication, these will go fast. Click here for the SkyGrid invites (all gone!).

Here’s a video of SkyGrid: