Trader’s Narrative

Fari Hamzei (of Hamzei Analytics) hosted a webinar by Jason Goepfert (of SentimenTrader) yesterday. I almost missed the chat myself so for those that did, here is a annotated summary. It includes most of the charts that Jason shared with us and I’ve included - to the best of my ability - some of the commentary that accompanied it as well as my own notes. If you love charts, then you’re in for a treat.

We’ve already discussed most, if not all of these various indicators but it is useful to those that are joining us now or as a recap. If you’re not familiar with Jason’s work, you can check out my review of SentimenTrader here.

Jason started off with data from the Options Clearing Corp. which aggregates option trading data for the various option exchanges. The OCC data can be manipulated to look at various slices of the market. For example, small option traders are now foregoing downside protection to a dangerous degree:

But the same can be said of the aggregate option sentiment out there. The last time we saw so much optimists was back in the bubble days of 2000:

The AAII survey of US retail investors spiked to an extreme level recently pushing the bears 2 standard deviations below their one year average:

As well, the AAII asset allocation has jumped back approaching levels which we saw at the start of the bear market. Also note that we saw an extremely rare occurrence in March 2009 when the portion of their portfolio allocated to cash exceeded that allocated to equities:

Next we looked at a very long term chart of the size of the retail money market funds. Most interesting is the ratio of retail money market funds to stock market capitalization:

The only other time in market history that there was enough money in retail money markets to buy 15% of the whole stock market was back in the early 1980’s. Then as now, after the spike higher, the size of money market funds shrank. Since the S&P 500 index chart isn’t logarithmically scaled, it is difficult to see but this comparable time period was a challenging one as the market fell clumsily until August 1982.

The next chart is one we’ve discussed at length. It presents the simple ratio of cash held within US mutual funds:

There are two other versions which make this indicator more useful. The adjustment for interest rates (for which Jason Goepfert won the 2002 Charles H. Dow Award) and the adjustment for inflation/deflation (for which I’m still awaiting my Dow award).

Back into sentiment surveys, here is a long term chart of the Investors Intelligence survey from ChartCraft showing that we are now back at 2003 bullish levels:

Next is the up and coming sentiment survey from the NAAIM. I’ve discussed this a few times before, most recently in the December sentiment overview. As the chart shows, we are back to the levels last seen in late 2007:

The Rydex traders continue to provide a rich mine of contrarian sentiment, even as they have become extremely myopic. For some reason, since July 2009 Rydex market timers have both shortened and intensified their switching back and forth between the two camps. But now, both the Bull/Bear ratio and the Leveraged Bull/Bear ratio are at an all time high:

Finally, here’s a chart from Insider Insights showing that corporate insiders have been selling their own companies shares hand over fist. Generally speaking dips correspond to market tops (but not consistently):

Jason wrapped up his presentation with a nod to some anecdotal sentiment indicators. For example, the ever bullish Jim Cramer as well as the unanimous bullish consensus at the most recent Barron’s Big Money poll. It seems that everyone is bullish. That lead to the Q’n'A portion of the webinar.

New Highs & New Lows Ratio
When asked about the Ned Davis Research report on 52 week highs and its consequences for a continuation of the rally, Jason commented that the market doesn’t turn on a dime. When we’ve seen this much market momentum, breadth wise, we usually see a decline and then a last gasp higher. It is unusual to see the market form a major top with the conditions that we have now. This surprised many I think because of the damning sentiment picture that the previous charts had etched.

Options Sentiment
Jason talked a little about some large dividend capture strategies which affected the options data at the start of the month. While some are concerned that this may account for some if not all of the extreme options ratios we are seeing, he said that this week saw no dividend capture trades and the option sentiment was no different.

US Dollar
Jason said the largest speculative position is long the US dollar now which is very bearish (sentiment wise). The Rydex fund flows are “not extreme but close” and there is too much optimism. Typically when we see a shift in sentiment like this, the trend higher can’t continue. Also, the correlation between the US dollar and stocks has weakened.

Plunge Protection Team
In response to a question about the possibility of market manipulation by the Fed as hypothesized (but not proven) by Charles Biderman of TrimTabs, Jason commented in derision that he is not a conspiracy theorist. “It is too easy to blame others for your own poor analysis.”

I’m sure there was more that I’m forgetting. As they say, you had to be there. Needless to say, I highly recommend Jason’s work. He consistently provides insight into the market above and beyond just sentiment. If you’re still not convinced, take a free 14 day trial and see for yourself.