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Sentiment Overview: Week Of August 28th, 2009 at Trader’s Narrative

Here is this weeks summary of sentiment data for the stock market:

The weekly AAII measure of sentiment continues to reflect a repentant US retail investor. This week the bulls were unchanged at 34% while the bears increased 9% points to 49%. This is a very abrupt change as it was just 4 weeks ago (Sentiment Overview: Week Of July 31st, 2009) that we had the mirror opposite with 48% bulls and 31% bears. And it was only 2 weeks ago when we saw 51% bulls! This is especially meaningful as the market is actually trading higher

Meanwhile, the Investors Intelligence Advisors Index - a metric of the mood of stock market newsletter editors - is finally showing extreme levels of bullishness. This week’s results pushed the bulls slightly upwards to 51.5% while at the same time reducing the bears to just 19.8%. That widened the gap between the two camps to almost 32% points or put another way, we now have almost 3 optimistic editors for every gloomy one.

So it took the II a few weeks to arrive at the +50% levels of bullishness that we saw from the AAII earlier this month. But while the AAII’s recent lopsided sentiment corresponded to the swing top in May 2008, the discrepancy in the II is even more ominous.

The last time we had less than 20% of the stock market advisors bearish was in October 2007 - the start of the bear market. While the percentage points between the two camps isn’t as wide as in October 2007 (40% points), it is 31.7% points - close enough to merit caution for the bulls.

Right now, looking at these two popular sentiment metrics can be confusing. Either one is ahead of the other or they are both wrong. Fortunately there are many other indicators we will take a look at after the jump.

Conference Board: Consumer Confidence
The preliminary data for August was stronger than expected, as it rose to 54.1 - the first increase since May 2009:

conference board consumer confidence Aug 2009
More interesting was the sub-index measuring investor sentiment. Bullishness for equities rose 8% points to 36.5% while bearishness decreased (by 7.6% points) to 26.4%. That may not seem like any extreme level, especially when compared to the AAII and II metrics cited above, however a 10.1% point gap is the largest bullish one since - you guessed it - October 2007.

The Daily Sentiment Index (DSI)
Jake Bernstein’s DSI continues to climb along with the S&P 500. It started this month at 87% and it has been nudged slightly higher by its end to 89%. This is, needless to say, rather extreme and from a contrarian perspective, bearish. It leaves its normal ‘high’ range of 60%-70% in the dust and is even the highest since 2007. Which should raise a few eyebrows as we know thanks to hindsight, that was a (cyclical) bull market. And here we are now, merely 50% higher after a counter-trend rally and even more giddy than at the bull market top. In contrast, at the low in late February 2009 the DSI was 2%.

Option Traders
There is no significant change in the sentiment picture from either the ISEE Sentiment index or the CBOE’s put call ratio index. The ISEE (equity only) finished the week with almost twice the number of call buyers as put buyers. But it continues to be mired in neutral territory once we step back for some perspective. The same can be said for the traditional put call ratio as it recovered slightly from last Friday’s one day (0.4) extreme reading. The short term average of the put call ratio (equity only) has fallen below the up trending channel as shown in last week’s sentiment overview.

Gallup Index of Investor Optimism
Dovetailing with the Consumer Confidence statistics mentioned above, the most recent monthly Gallup poll of investor optimism rose to its highest level for the year:

Gallup Index of Investor Optimism Aug 2009

This broad measure of investor perceptions continued to rise out of the historic low it reached earlier in the year when it fell to -64. That was the lowest it has ever fallen since its inception in October 1996. This month the index reached +9, the first time that it has regained positive territory since June 2008.

Checking in with the Greybeards
I like to keep a loose finger on the pulse of the market participants who I refer to as the ‘Greybeards’ - those who have been around more than a few market cycles and have profited to tell tales about it. Among these, Doug Kass has the distinction of calling the spring low and catching the rebound. So now that he is calling the top, we need to pay attention. Even more intriguing, a pollshows that 70% agree with him that the market has topped (while 30% don’t):

doug kass calls top Aug 2009 survey

By the way, I mentioned Kass’ call days ago at so if you want to stay current on interesting articles, news and analysis make sure you bookmark it and check back often.

David Rosenberg continues to label this a robust bear market rally and refuses to consider it as anything else. Needless to say, he expects lower prices ahead.

Corporate Insiders
According to TrimTabs, corporate insider selling has spiked to $6.1 billion - the highest amount since May 2008 when the S&P 500 peaked at 1420. More important than the dollar amount involved, the ratio of selling to buying reached 30.6 - the highest since 2004. To provide further perspective, the ratio at the spring low was 2:1 and its long term average is 7:1. As well TrimTabs reports that their own proprietary liquidity metric, TrimTabs Demand Index, which measures 18 fund flow and sentiment indicators has turned down for the first time since March 2009. A caveat, corporate insiders are not the all seeing, all knowing entities that they sound like. They have been wrong or early many times before. However, they still merit attention, especially when their actions reach a crescendo.

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15 Responses to “Sentiment Overview: Week Of August 28th, 2009”  

  1. 1 Kenny

    In the 5th paragraph, I thought “advisors bullish was” should read “advisors bearish was”.

  2. 2 Babak

    thanks Kenny, fixed now

  3. 3 burt

    If I’m not mistaken, Kass has called a top several times since the upmove began.

  4. 4 Babak

    burt, the article linked above is the first one that I’m aware of. If you know of an earlier one, let us know.

  5. 5 burt
  6. 6 Babak

    burt, thanks. I suspect that he’s being misinterpreted. A hedge fund usually puts on layers of exposure so he may be getting more and more bearish as the rally gets long in the tooth. Or maybe not and I’m giving him the benefit of the doubt here.
    Also, I do remember right after 9/11 he was extremely bullish and was buying pretty much right into the dump. Then he turned around and sold it back as the market recovered higher in a ‘V’ bottom. So he’s nimble that way.

  7. 7 wayne

    The fact that two thirds of readers agree with Kass bearish call may be the best contrarian piece of data presented. As long as investors continue to quickly turn bearish on every down day, the market can continue to climb wall or worry.

  8. 8 Jay (market folly)

    hey great post, always like to look at sentiment readings. In reference to Kass, I fully agree with your assessment that he has most likely layered into his positions over time. However, he started doing so quite early and is undoubtedly underwater on that part of his position. If you follow Kass’ twitter stream, you can see the timeframe. One of our friends has compiled that and we posted it up illustrated his sentiment from the lows to his now ‘toppish’ stance
    I give him great kudos for the bottom call he made, fantastic timing. He has been early on this call, but if it comes to fruition and he ultimately profits, that will be quite a feat.

    By the way, keep up the great work… enjoy reading your stuff!


  9. 9 Babak

    wayne, looking at the raw data, that may be true, however I suspect the audience of is not really comparable to AAII (retail investors or ‘dumb money’).

    Jay, thanks for the twitter feed, that clears it up. Appreciate the compliment - you’ve got a great blog there yourself. btw, any chance you have a copy of the hedge fund letters you had to take down recently? would appreciate it if you email them to me @ babak at tradersnarrative dot com for my own perusal (not to re-publish of course).

  10. 10 Dave


    Thank you for including the DSI this week.

    Do you have any sentiment readings for gold & crude ? I read recently that Ned Davis Research was showing a lot of pessimsim on gold.

  11. 11 wayne

    Analyst can show that actually trading against the majority is a losing proposition. You usually want to go with the majority until they are overwhelmingly one sided. And it has been my experience that when you are in a bull market or a market where monetary policy is favorable that sentiment readings range from 50 to 70 and when you are in a bear market where the federal reserve is in a tightening mode that the readings range from 30 to 50. If you look at the sentiment readings during the 90’s when the market tripled, you will see that most polls showed 2/3rd bulls several times and shorting such numbers was a tough way to make a living. Not to suggest, that we are back in the 90’s, but simply to point out that sentiment #s are just a piece of the puzzle.

    On a separate subj, in case readers are interested.

    October gets a lot of print because of the crashes in 1929, 1987 and 2008, but September is actually the only calendar month of the year that has been down more times than up since 1950, has a negative average and median return.

    These #s are updated through Aug 31, 2009, starting in 1950 - which means a very modest change to both July and August #s from previous stats.

    Sept seasonality wayne comment

    The below stats were posted on CNBC’s site yesterday

    S&P: (Since 1928)

    * On average the S&P has declined -1.3% in September
    o Worst month on average overall
    o On a day-by-day basis, the S&P has been down 22 days out of the 30 days in September
    o On average, the S&P has dropped -1.8% in September, when following an up August
    o Up 43.2% of the time in September, average gains of 3.2% when up
    o Down 55.6% of the time in September, average loss of -4.8% when down
    o Flat in September 1979
    * The biggest September gain was in 1939, when the S&P finished up 14.4%
    * The biggest September loss was in 1931, when the S&P finished down -30.5%

  12. 12 Jim

    I don’t think you can read too much into the poll because of the way the poll is worded. “This smart, qualified person thinks X. Do you agree with him?” is a classic leading question.

  13. 13 Babak

    Jim, true, it isn’t worded objectively. So Jim… have you stopped beating your wife?

  14. 14 Tyler

    I get the feel that people really want sentiment to be bullish. But I don’t see the greed or signs of the excessive euphoric greed that might mark a top. Is excessive bearish a positive for the market? No. But neither is there excessive bullishness.
    The AAII data is especially interesting. more bearishness in the face of a rising market! Babak, you say it perfectly, “This is especially meaningful as the market is actually trading higher.” Focus on that. and also on what the ‘feel’ is out there. step back and what is the objective feel? It’s not euphoric.

  15. 15 Tyler

    Sorry, I didn’t proof read. the third sentence doesn’t make any sense. Here’s how it should be:

    I get the feel that people really want sentiment to be bullish. But I don’t see the greed or signs of the excessive euphoric greed that might mark a top. Is there excessive bearishness right now? No. But neither is there excessive bullishness.

    I find the AAII data especially interesting…more bearishness in the face of a rising market! Babak, you say it perfectly, “This is especially meaningful as the market is actually trading higher.” Focus on that. And also on what the ‘feel’ is out there. step back and ask what is the objective feel? It’s not euphoric. A move away from excessive bearishness to neutral may feel euphoric in light of the recent past, but there are still signs of fear out there and very few of greed.

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