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Sentiment Overview For Week Of August 31st 2007 at Trader’s Narrative





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A little late due to travel, but as they say, better than never…. here’s the sentiment recap for the past week:

AAII
Still too many bulls in this sentiment reading (40%) but the bears are still outnumbering them at 46%. There’s no denying that during this correction the Mom’n'Pop retail investors have come across as outright cold-blooded creatures. My own personal theory is that they simply don’t care about the stock market because they have very little invested and therefore, little at stake.

Investor’s Intelligence
No real change in this indicator. The newsletter writers are pretty much where we last left them last week: about equally split between the bulls and bears.

I’m a bit puzzled why this sentiment indicator is so flaccid. Especially when you consider that according to Hulbert, newletters are rather spooked (see below). My hunch is that Chartcraft and Michael Burke (editor) have a slightly different interpretation of newletter writer’s intentions. You have to remember that unlike many of the other sentiment measures, this one involves a subjective call which categorizes the letter as bullish, bearish or neutral.

Hulbert Stock Newsletter Sentiment
The HSNSI closed August at +5.5%- this means that for the newsletters that try to time the market in the short term, they are on average only recommending being 5.5% long this market.

Although this measure has risen from about two weeks ago when it reached -11.3%, it still provides us bulls with some ammunition. That’s because in the face of a ~600 point rally in the Dow, the newsletter timers have only dipped their toes into the stock market.

Had they rushed in wholesale, things would be different. But they are obviously still timid and only reluctantly admiting that the market isn’t all that bad after all.

Consensus
Consensus bullish sentiment reacted sharply to the market’s gyrations by jumping 7% last week. It had plumbed depths that it had only seen before during last year’s August correction.

Market Vane
In contrast, Market Vane hasn’t really budged. At 53%, it is still quite low. And although I referred to an interesting interpretation of its recent behaviour during the last weekly sentiment review, I still think it should be interpreted from the traditional upside down, contrarian point of view. So nothing new here.

Massive Doomsday Options Trade
Finally, I wanted to touch on the story that has been making its way around the internet, trading discussion forums and even CNBC: that a massive options trade has been put on which predicts that the market will crash in the coming months.

The details of the story are pretty much everywhere. I found mentions even on digg and reddit. Ugly mentioned it a while back when it was just going viral. Make sure you also check out the discussion in the comments section.

When I heard it, I must confess, it made me chuckle.

Would anyone really put on a one sided options bet like that? and would they do it via the very public options market rather than the more private swap market?

If you believe this conspiracy theory, you need to get in touch with me stat. I’ve got a wonderful bridge in Estonia to sell you for a very reasonable price.

But seriously, this sort of doomsday story goes viral because it feeds on people’s fear (and ignorance). And that is a truly insightful contribution to sentiment.

Since over here we practice contrarian analysis when it comes to sentiment, this is exactly the sort of brick that walls of worry are built from.

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