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Sentiment Overview: Week Of August 14th, 2009 at Trader’s Narrative

Below is this past week’s summary of sentiment data:

According to the American Association of Individual Investors, the average retail investor in the US is down right giddy. This week the bears declined by 2% points to number just 33%. The bulls meanwhile managed to eke out a tiny 1% point increase from last week to reach 51%. Anytime we see the magical 50% mark in either camp, I take special notice.

To find a higher level of bullishness, we have to go back to May 2008. For the week of early May 2008, the AAII survey showed 53% bullishness. In that sentiment overview, I wrote:

There is no way we can discount or ignore this. Such a high level of bullishness is downright frightening - from a contrarian point of view.

When I wrote the above, the S&P 500 was trading around 1410. In a few weeks it had managed to peek over 1420. But that was it. If you were looking or a sign that the market rally had petered out, you would have a hard time finding a better one. By July 2008 it had fallen to 1200 and by November to 750. As well, this level of bullishness is extra noteworthy because it was at this level of optimism on October 2007 that the stock market topped and entered into its current bear market.

In the same way, I think today, if this single data point doesn’t make you run for the door, it should at least be making you eye the exits warily. While the retail investor has been building back their confidence throughout this rally, their increasing bullishness will inevitably reach a climax point. Here’s a chart showing the last 3 times that the AAII sentiment was so optimistically lopsided that at least 50% were bullish:
S&P500 AAII 50 percentage bullishness extreme 2007-2009

Investors Intelligence
Turning to the survey which measures stock newsletter editors, ChartCraft’s II came in this week with 49.4% bulls (a 7.2% point increase from 2 weeks ago) and just 21.3% bears (almost 10% points decrease from last week). After a length of time where the II and AAII were not synchronized, they now are not only showing almost the same level of extreme bullishness, they have both insisted on becoming even more bullish this week.

Accordingly, we have twice as many bears as bulls now. The negative consequences of this much unreserved joy isn’t difficult to fathom. This week’s data is highest level of bulls since January 2008 and the lowest level of bears since October 2007. Obviously neither of those times an opportune moment for the longs.

CEO Survey
According to the Conference Board, a survey of CEO’s in the US shows that 55% of them are now expecting an economic recovery in the next 6 months. That is a 38% point improvement from March 2009 - the second largest such increase in the 33 year history of this survey. The largest jump came as we left behind the recession of 2001.

NFIB Sentiment
The National Federation of Independent Business’ sentiment survey of small businesses does not show a concomitant increase in optimism. In fact, the NFIB’s small business sentiment index fell to 86.5 - the lowest level since March 2009, when the market made its lows. Not only that but the July result was among the 5 lowest readings in over 30 years of the survey’s history. So clearly, the US small business owner is still suffering tremendously.

Option Traders
This week the CBOE’s (equity only) put call ratio didn’t even rise above 0.65 and closed today at 0.52 - not far from its low of last week. Basically we see the same approximate ratio as the sentiment surveys suggests, 2:1 bulls to bears. To see the chart of the CBOE put call ratio, check out last week’s sentiment overview

The ISE sentiment index continues to forge its own bland path. The daily numbers reached a low of 146 and a high of 180 this week and the 10 day short term moving average is only at 168 - neither hot nor cold. I’m not sure why the ISE option traders are not showing the same level of bullishness. If you do, drop me a note in the comments below.

VIX Futures
Traders in the CBOE’s volatility index (VIX) futures are betting that the index will rise by 13% in 5 weeks. That’s the biggest such spread since August 2008 - just before the waterfall decline. So it would seem that the smart money is willing to pay a premium for protection in case the stock market declines. I consider this a ’smart money’ indicator since the average retail trader or investor has either not heard of the VIX or has never traded a futures contract.

Corporate Insiders
According to InsiderScore, corporate insiders have reduced their buying and increased their selling activities. This has caused the ratio to reach a multi-year low. Although this is another ’smart money’ indicator, it is one which usually precedes the market by a few months. For example, to find a lower ratio of buying to selling we’d have to go back to late 2006. But the market didn’t really top out until we were well into 2007. So if we were to go by this indicator exclusively (which we don’t obviously) then we would expect the market to continue its momentum induced ramp up and peter out in a few months.

Magazine Cover Indicator
optimistic ostrichcase for optimism businessweek magazine cover Aug 2009Business Week magazine is probably the quintessential magazine cover indicator provider so it is exciting to finally see something like this weeks cover image: an ostrich which has its head buried through the sand to only come back up through another hole and stare back at us. Also notice that the artist added a sun breaking through dark clouds in the background. What say ye? Lets hear from the art critics, er.. I mean the contrarians!

Strategists, Greybeards and Hedgies
Let’s take a moment to count the worthy experts who are still non-believers in this rally: Paul Tudor Jones II, who runs Tudor Investment Corp., the $10.8 billion hedge-fund is an unavowed bear and identifies the recent market recovery as simply a “bear market rally. Doug Kass (of Seabreeze Partners) was correctly bullish months ago and is now telling us to lighten up and to not expect much going forward. David Rosenberg doesn’t think this is a lasting rally and he continues to be worried about deflation. Finally, Bob Janjuah, global strategist for Royal Bank of Scotland who has the distinct honor of not only calling the bear market but also the spring rally. He is now telling clients to sell equities and buy German 10 year bonds because he expects the March lows to be tested and even penetrated.

Arrayed on the other side of the see-saw are Soros, who believes that we have averted a major crisis and are climbing back; Faber, a natural born bear who has shed his fur for some horns, at least temporarily - but he also warns that an ever bigger reckoning will be upon us soon enough; and finally, Greenspan (who we talked about last week).

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8 Responses to “Sentiment Overview: Week Of August 14th, 2009”  

  1. 1 Dave

    “By July 2009 it had fallen to 1200…” Assume that you mean July 2008 ?

    Last sentiment posting you cited Market Vane, Ned Davis Research & Jake Bernstein. Do you have those figures this week ?

    Thank you

  2. 2 bob j

    Thanks for another usefull and timely report on sentiment data. I read it every week.

    Some thoughts on interpretating sentiment data;

    1. Sentiment increases have still lagged the run up in stocks; hence sentiment is not overly optimistic yet. Liz Ann Sonders
    2. Sentiment peaks occur in retrospect; hence, sell signals from sentiment data occur after sentiment is very high and reversals downward from the highs. Ned Davis
    3.Sentimend data for high optimitism is different for bull and bear markets and diferrent
    when monetary conditions are tight or easy. Ned Davis

  3. 3 Rob Weigand

    One lesson we learned from the 2003-2007 phony-baloney bull market (I call it this because all real returns since 1996 were erased by the March 2009 lows) is that a fake bull run can start from high P/E ratios and last for years before investors pay the piper. In March 2003 the long-term P/E ratio (Shiller’s P/E10) was over 30. Over the next four years, earnings growth outpaced stock returns thanks to leverage, leverage everywhere, and by the time of the market peak in 2007, P/E ratios were back in line with their historical averages — and financial armageddon ensued. There’s nothing to say that traders can’t juice up stock valuations in the same way, making things very uncomfortable for fund managers to sit on the sidelines for months and years. We were better off when everything we needed to know about the stock market could be summarized in 30 minutes of Wall St. Week With Louis Rukeyser. Now, with CNBC and Bloomberg 24/7, non-news becomes news and traders just churn the living bee-jeezus out of asset values morning, noon and night until valuations are so removed from fundamentals that they are just pulp and everyone’s trading on news about news.

  4. 4 Herb Earversmells

    wondering how you make the leap that smart money is causing the vix configuration that you seem to think is bearish. The vix has been wrong ont he market all year as an indicator, so why is it now suddenly, a smart indicator?

  5. 5 Babak

    Dave, thanks - fixed it. I usually bring up specifics if there is something interesting or noteworthy otherwise the sentiment overview would be 40 feet!

    Herb, not the VIX but the posturing via VIX futures.

  6. 6 Trader Kitteh

    While I am not an expert on the bullish % data, the one potential issue that stands out in the above graph with 50% marking the tops is that it is in the context of an overall bear market downtrend. That part is very clear as it is all in the past to see. However, the current rally is obviously of a much larger scale to those shown - and it just might be that we are in a new bull market on a higher timeframe. Therefore, I think it would be worthwhile to look back at the figures during, say 2003, to see what the figures look like then. Otherwise it might be comparing apple to oranges if we only look at the recent past when the context seem different.

    On the VIX futures I have a different read. I think that demand for protection is very high, as indicated by the term structure and the level it is trading at above realized, which means the popular side of the trade is long vol and gamma. IMO, the surprise would be a collapse into the teens.

  7. 7 van

    Faber is looking for a correction

  8. 8 Chris Maye

    Everywhere I read, all I see are negative articles on the market looking for a pullback. The AAII may be bulilish, but are they bullish but looking for a pullback to get in?


    All closed within 1% of last week’s close, tells me that the market really doesn’t want to “pullback” 10%. It is more like wanting to consolidate and push higher…(much like we saw June into early July)

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