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Here is this past week’s important sentiment data:
Stock Timing Newsletters
The Hulbert Stock Newsletter Sentiment Index (HSNSI) was at 27.5% at the start of the week. Meaning that the average stock timing newsletter was recommending to their readers that they be long the equity market with 27.5% of their portfolio. This is where they were the previous week, before the powerhouse performance that the stock market put in rocketing higher with 90-90 up days.
So from a relative point of view, that performance did nothing to impress the average stock timing newsletter editor. This is bullish from a contrarian point of view. On an absolute level however, the HSNSI is well above the -29.4% it reached in mid March 2008. But it isn’t yet yet high enough to give me concern.
The weekly American Association of Individual Investors sentiment survey has suddenly veered sharply into a bearish stance. It wasn’t that long ago that we had more than 50% of respondents in a bearish posture, but now that number has withered to only 28%. To find a time when the AAII survey was more bearish we’d have to go back to October 2007 when the market made its swing high.
Although it is just one measure of sentiment, it makes me uneasy. I’m glad that I’ve already reigned in my enthusiasm.
Inside last week’s sentiment overview I mentioned that the CBOE equity only put call ratio had declined to dangerous levels (for the bulls that is). That is confirmed by the ISE sentiment data.
On Monday it reached a high of 158 - meaning that retail option traders were buying to open 158 call options for each 100 put options. It has since fallen to 117 on Friday and the 10 day moving average is still fairly low but still, it does give me another reason to be cautious here.
I’m talking about the legal variety here, the kind that is communicated to the SEC and tracked by various services like Vickers/Argus and Insider Insights. Insiders have been actively buying during the markets most recent fall. Since insiders have an intimate knowledge of their market and businesses this is a big positive sign. On the other hand, had they instead sold en masse while the market fell, it would mean that we were not close to a bottom and had more to go.
According to Argus’ data for the past two months, insider selling to buying is 1.40:1 - meaning that for every $1.40 equivalent sold by an insider during that time, $1 was spent on buying stocks. Since insiders are normally net sellers, any decrease in this ratio is what matters. According to Argus, it is bullish anytime insiders are selling less than twice what they buy.
To add another to the set of indicators that compare the present market conditions to those of the end of the 2002 bear market, the current insider ratio is very similar to what it was then.
So while in the medium to long term, the viability of a continuing rally is still looking pretty good, there are gathering signs that we may backtrack a little or pause before fully exploiting it.
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