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Market Recovery Continues But Few Believe In It at Trader’s Narrative

I’ve been yammering on about market bottoms, bullish indicators and contrarian sentiment and other similar ideas for some time. The only thing I haven’t done is reach through the monitor and slap you around till you get some long exposure ;-)

Today money flowed into advancing stocks to a staggering degree. As measured by volume, advancing issues were 3.5 times the declining ones on the NYSE and 8.3 times on the Nasdaq. That’s short of the sort of stampede that gives us the rare and valuable 90-90 days but there was no question buyers were in control.

Yesterday’s market action was similar although much more muted. Coupled with Monday’s hammer candlestick, we now have 3 consecutive up days. It would seem (if I may count my chickens before they hatch) that we are having a successful retest of the mid January lows above the 1320 S&P 500 level.

You’d think that in a such a scenario people would be bullish, or atleast a bit excited, right?

Turns out that while the market has been going higher, people are actually not excited at all. In fact, they’re slightly more bearish! Check out this chart comparing the S&P 500 index (candlestick) with the CBOE equity only put call ratio (line):

spx cboe put call ratio comparison

Take yesterday as an example. While the S&P 500 reached 1360 and managed to close up 0.93%, the CBOE equity only put call ratio went from 0.68 to 0.78 - meaning that people bought more puts than the previous day. Also, the ISEE Index dropped from 115 to 82 - meaning that people bought less calls than the previous day.

Today the market went up another ~1% and we had the CBOE put call ratio drop ever so slightly (almost unchanged) and the ISEE Index dropped again, from 82 to 72. That’s equally as pessimistic as February 5th, when the market fell 3.2% in one day!

Of course, the usual and expected pattern is for option traders to buy calls when the market goes up and to escape into the shelter of puts when it goes down. The opposite happens from time to time and I don’t want to read too much into just two day’s worth of data but nevertheless, it is noteworthy.

It would be very normal for the market to pause and digest this short term move up but the negative sentiment is undeniable. And it is congruent with other things I’m seeing. For example, most of the email I get is about how we are about to fall again and how the “bulls are going to get slaughtered”, etc.

The market can be a sadistic vixen, exerting maximum pain on the maximum number of people. That’s when it pays to be in the minority.

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5 Responses to “Market Recovery Continues But Few Believe In It”  

  1. 1 LP

    I’m not buying this rally because of the financials. Most of them are seriously lagging behind. This doesn’t not mean that today will not be huge huge up day for them, but it would be nice to see them doing much better. Plus the volume has been so so. Two factors that hold me back. But then again isn’t the market here to disappoint the most number of participants? So the question remains are there more short sellers than long buyers?

  2. 2 MalcomX

    People have been calling a bottom in this market for weeks. We are soon rolling in on the fourth?? week that people have called this a trade-able rally yet the S&P return over that period of time is zero to negative depending on when one bought.

    The rally is very thin and originally was led by short covering in financials then the same old commodity trade as hot money rolls into ag now. The S&P is all that matters. What is the S&P telling you??

  3. 3 LP

    I will have to agree with Malcom X. I’m not sure why people are such a hurry to get back into the markets. Many bear markets just get stuck in a range where the bottom gets tested several times anyway. Yeah there’s a possibility that we may never see the lows again, but I’d rather wait a bit longer. I think most people who are busy calling a bottom are the ones with open positions. I think patience may pay off big time. Imagine getting companies like GS at a 40 - 50% discount. I would rather wait for something like that even if it means I will be disappointed and forced to buy them at 200.

  4. 4 Keith Shepard

    I think another reason is the slow-motion pummeling of bad “fundamental” news that continues to drip into our trading psyche. Day after day, it’s this:

    ยป U.S. Michigan Consumer Sentiment Drops to 16-Year Low

    Even I, a mechanical trader, find it hard to believe in a “bottom”. I think as Brian over at likes to say, “bottoms and tops are a process and not an event”. To me, there are a lot of technicals lining up to begin the bottoming process, but in the short term, the fundamentals just haven’t exhausted the downside enough.

    The bad news is still too slow to come out. There needs to be that “thud” of collective angst.

  5. 5 LP

    Keith I totally concur with the Thud theory…when that comes out either up or down…then I know it’s over….until then I will just have to observe a safe technical level for a Long and Short…

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