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Sentiment Overview: Week Of December 11th, 2009 at Trader’s Narrative

Here’s this week’s rather comprehensive sentiment summary:

The weekly retail investor’s sentiment survey from AAII is little changed. Both camps are 1% points higher, making it 43% bears and 35% bulls. The AAII has returned to more ‘neutral’ territory after the early November extreme (when we had 56% bears and only 22% bulls).

Usually, we’d see a huge up move after such an extremely gloomy mood among retail investors. After all, things were about this dark and foreboding back in February and March, just before the rally was ignited. But since early November the S&P 500 has only eked out a 5% gain. This baffling response may be explained by the turbulent cross currents in sentiment as we’ll see below.

Investors Intelligence
In contrast to the AAII, the newsletter sentiment is extremely bullish. This week, the Investors Intelligence bulls a smidgen less than last week, at 48.4% but what has everyone’s attention is another record low for the bears at 16.5%. This means that for a second week, there are about 3 optimists for every 1 pessimist out there in newsletter editor-land. If you’re trying to be contrarian, this can be confusing! Which metric do you listen to? which do you discount?

investors intelligence sentiment survey Dec 2009 extreme

While everyone has been concentrating on the dichotomy between the Investors Intelligence bullish and bearish camps, it isn’t all that uncommon to see this much optimism in this sentiment measure. In contrast to the AAII survey, the third option is not “neutral” but rather newsletter editors expecting a “correction” in the short term (and a rise in the market long term). Right now, that describes 35.1% of editors which is the highest since 1992. Strangely enough, while the interplay of the bullish and bearish camp is a contrarian measure, the correction camp has actually been accurate (when at an extreme, like now).

CNN Money Poll
While economists are debating whether we’ve already seen the end of the recession, the average person in the US has no doubt. According to a recent CNN/Opinion Research poll, 84% of Americans believe that we are still in a recession. The poll also found only 15% who believed that things were getting better while 39% believed that things were getting worse!

Public Perception of Bankers
Thanks to their inability to take responsibility for the financial crisis and their infinite sense of entitlement, I’m sure you won’t be surprised to learn that the public image of bankers is scraping the bottom of the barrel:
public perception of bankers Gallup poll
Source: Gallup

NFIB Survey
The survey of business optimism from the National Federation of Independent Business’s (NFIB) throws cold water on the nonfarm payroll surprise. The November results indicate that small businesses, the engine of the US economy, continue to see weak sales growth, frozen credit and lending conditions and not surprisingly, few employment intentions.

NFIB optimism index Dec 2009

The result (88.3%) is a four month low for the survey and indicates a continuation of a stressful economic situation. Typically, when the economy is going from recession to expansion, the NFIB optimism averages 97%. And when the economy is doing well, it averages 100%. So all in all, at least according to this gauge, it is way too soon to expect the Great Recession over.

Wall St. Strategists
The consensus among Wall St. strategists is a gradual return to equities. At the low in March they were recommending only 51% exposure to equities, which is quite low considering how fond of stocks they usually are. To find a lower allocation, we’d have to go back to 1997. In contrast, they are recommending 57% right now. That is the highest amount for the year but is still way off the maximums (72% in early 2001).

Similar to their less remunerated retail equivalents, Wall St. strategists went ga-ga for fixed income earlier this year. Falling concomitantly with the price of long dated US bonds, their allocation to fixed income decreased from a high of 38% earlier in the year to just 34% now - which is still incredibly high. So in perfect contrarian fashion, they went on a binge just as bonds were extremely expensive and they are upping their allocation with gains in the stock market.

Options Sentiment
While weekly sentiment surveys may be confusing, the options market has been sending a clear signal. And it continues this week with the CBOE put call ratio (equity only) still below the multi-year trendline that has marked previous stock market tops:

cboe put call ratio equity only Dec 2009

The put call ratio fell to its long term upward trend line back in May 2009. The S&P 500 responded by topping out and trading sideways for the next few months. The rally continued after that however, and the appetite for calls soon returned with a vengeance. We’ve been now trading below this important level since August. Even if we disregard the upward tendency for this ratio, we are still seeing the kind of option activity that marks tops, not bottoms. Another clear indication of this is the options speculation index shown last week.

We are seeing a similar picture emerge from the ISE sentiment index. While it has turned down from the high it reached in late October 2009, it is still elevated at 161:

ISE sentiment 10 day moving average Dec 2009

Gold Sentiment
Since beating the drums relentlessly for a few weeks about a top in gold, marked by excessive positive gold sentiment, the precious metal finally started its correction. You can add the Market Vectors Junior Gold Miners ETF (GDXJ) to the list of signals by the way. Junior gold miners are more speculative with many of them - believe it or not - operating with a negative cash flow in these lucrative times for gold. But when the ducks quack!

Tocqueville Asset Management who started their gold fund back in 1998 - when all the cool kids were going crazy over technology stocks - summarizes the difficulty in parsing the sentiment in gold:

The commotion surrounding gold makes the contrarian strand of thought harder to detect. It is not that we don’t welcome the “Johnny come latelys” to the hard money cause. They are, for the most part, elite investment thinkers who have a history of sound decision making. However, we no longer enjoy the luxury of peace and quiet or as much time to reflect. Our periodic sanity checks, based on the makeup of the opposition, are somewhat less frequent and perhaps not as reliable. Still, we perceive that gold continues to be under owned and misunderstood by most. While it is no longer enough to observe that the metal is of interest based on universal apathy, it is safe to say that it has a long way to go before it becomes mainstream.

You can download their full report, from the free Trading Resource section of the blog (Reports & Articles folder). Needless to say, even a super-bull market needs to pause and take a breather.

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3 Responses to “Sentiment Overview: Week Of December 11th, 2009”  

  1. 1 Peter

    Hi Babak,
    First of all I would like to thank you for this incredible blog. It’s the best source of information I’ve found up to now. I especially like the sentiment overview.

    One small remark, shouldn’t this weeks review be called: “Sentiment Overview: Week Of December 11th, 2009″?

    Regarding the contrast between the AAII (43% bears, 35% bulls) and the Investors Intelligence (16.5% bears, 48.4% bulls) maybe the difference is due to the AAII being a short term indicator and the Investors Intelligence being an intermediate to long term indicator. I guess if we wait a little longer we will see the AAII align itself as extremely bullish and then we will have a clear signal for a correction.

    Thanks again


  2. 2 wayne

    Babak & Peter,

    Babak, you have shown studies from other sources that show that the retail investor hasn’t joined the bullish camp. I would suggest that the AAII poll reinforces those studies. I am a bit unnerved by the II numbers, but encouraged by AAII. Lets see how December ends up and we may have a much better feel for 2010. I’ll have more detailed end of the year comments soon.

  3. 3 Babak

    Peter, thanks for the kind words. And yes, it is the 11th on the calendar - just checking if you’re paying attention :)

    re the contrast, the AAII can be a very good long term indicator. For example, in March it hit an extreme of 70% bears and only 19% bulls… which marked the spring turning point.

    Wayne, I think December will hold up if by nothing due to sheer will power by the asset management community who wants to lock in their incentive pay/bonuses. January will be a clean slate and the clock will start again.

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