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Sentiment Overview: Week Of December 12th, 2008 at Trader’s Narrative

Here is how things be for this week in sentiment land:

Sentiment Surveys
Last week when things looked a little bit brighter, from a contrarian point of view, I wrote:

However, I don’t want to get too excited because it is just one data point. If we start to see a dispirited response to a continuing rally, in the coming weeks, then it will be a tell tale sign that the rally will stick. Otherwise, if we again see sentiment do an abrupt about face, we’re headed down (again).

One data point is just that. And no more after this week’s sentiment surveys. The Investor’s Intelligence survey of stock newsletters returned a slightly increased 25.3% as optimists and a few less bears at 46.2% (from 49.5% last week). In short, sentiment shows that there is slightly more bullisness in the market.

The AAII which measures retail investors shows a similar effect with the bulls at 37.50% and the bears at 39.84%. This is a much larger move to optimism than the newsletter editors. Basically the AAII sentiment is equal - which from a contrarian point of view isn’t good news. Rather than seeing further reluctance from investors and traders to believe in the market as it rises, we are seeing them jump aboard with itchy trigger fingers.

My hunch about a third trendline break may be spot on as sentiment analysis suggests we are headed down (again).

ISE Sentiment
Continues to be mired in a narrow range. Until it breaks out of this contraction phase, it won’t reveal anything worthwhile. This is true for both the equity only ISE sentiment index and the all securities (which includes index option data).

CBOE Put/Call Ratio
The traditional method of looking at the options market continues to throw a curve ball. This week while the market went sideways and dripped lower, the CBOE put/call ratio actually went up from less than 0.72 to 0.90 - does anyone make sense of this? By the way, I’m referring to the equity only data which is usually less noisy.

While volatility continues to be at historical extremes the VIX has formed a coil or triangle contraction. A break down from this formation would mean a turn in the uptrend. Until there is a resolution of this range contraction, we have to live with this crazy market.

The volatility is mildly reminiscent of the bull market of the late 1990’s which allowed so many to extract multiples from swing or day trading. So while it can be gut wrenching from the stand point of a longer term investor, to a trader, it is a godsend after so many years of drought.

Wall St. News
The recent arrest of Bernard Madoff can’t be considered anything but a negative event. At this point, the market looks like a centipede with everyone is wondering when the next shoe will drop. How can so called “sophisticated” investors be so “dumb”?

And isn’t it curious that a massive redemption slip fueled by an unprecedented financial crisis unveils a fraud of gargantuan proportions ($50 billion)? 1% a month, like clock work is too good to be true. Why didn’t more people realize that if it seems to good to be true it probably is? How can you invest billions without the bare minimum due diligence?

The only consolation is that historically, mega-scandals like this come at the tail end of bear markets. We only have to go back a few years to Enron, WorldCom, etc. When the tide goes out, you get to see what was scurrying about at the bottom.

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2 Responses to “Sentiment Overview: Week Of December 12th, 2008”  

  1. 1 jeremy

    Magic 3?

    Fan lines 1 and 2 taken from a lower point than from Fan line 3.

    Fan lines should spread out from the same point, so your point about a potential breakout in January looks to invalidted to me-unfortunatley!

    If Fan line 3 comes from same as 1 & 2, using same angle, breakout 3 looks some distance away.

    Interested in your thoughts.

  2. 2 Senta

    The Madoff scandal is just amazing. It dwarfs previous frauds like worldcom, enron etc.

    I lost quite a bit of money on the financials - AIG, Fannie, Freddie, Citi, Wamu etc.. I can blame management incompetence and greed for these but this is outright fraud.

    Are there more shoes to drop? If so S&P may hit 600 as the public panics and pull their money out of mutual funds etc.

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