Trader’s Narrative

Here’s a quick recap of the sentiment data for the past week:

Sentiment Surveys
We are finally seeing some initial bullish patterns emerge from sentiment surveys. I mentioned repeatedly that what I would prefer to see was a situation where the sentiment would become more bearish as the market rallied. Until this week, we had seen a quick about face in sentiment with many jumping on any rally and switching from pessimism to optimism. But this week provided a slightly different take on this.

The Investor’s Intelligence which monitors newsletter editors showed bulls decreasing almost 6% points to 23.1% and bears increasing almost the same amount to reach 49.5%. While the number of bears is down significantly from its peak at 55% in November, what is encouraging is that this slight increase in bearishness corresponds with strength in the stock market.

Similarly, the AAII sentiment released this week shows that bearish sentiment increased 3% points to 48% and bullishness decreased 4% points to 27%. The weekly survey comes out on Wednesday, which means that while the S&P 500 is at a slightly lower - almost equal - level (850-860) to last week, sentiment has definitely soured.

This is a good sign, from a contrarian point of view. 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).

Options Market
Here is a chart of the equity only ISE Sentiment Index showing the contraction that I pointed out a while ago is still continuing:

I’m not sure what this means. Perhaps the ISE has simply changed and is no longer able to provide the same signals because there has been a fundamental change in the participants. Or maybe there is another explanation? Any ideas?

The traditional perspective on put call ratios from the CBOE continues to be ambivalent, at best, and downright confusing at worst.