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Sentiment Overview: Week Of December 7th 2007 at Trader’s Narrative

With the impending FOMC decision, traders are going to be twitchy and nervous. Although a 25 basis point cut is baked in, until we get confirmation, the market will probably not trend.

If you’ve been reading the blog for the past few weeks, you’re no stranger to my repeated bullish commentary. The market seems to have bottomed right on time with the Nasdaq composite sitting +150 points higher now.

So lets see what the last week brought us in terms of sentiment data:

AAII Sentiment Survey
With the market powering ahead last week with back to back up days, sentiment has shifted. The AAII respondents are neck and neck with 41% bullish and 40% bearish.

Put Call Ratio
The options sentiment ratio spiked up to almost 1.0 in mid November as people rushed to buy puts. But now the equity put call ratio has fallen by almost half. This isn’t automatically a negative as the market has recovered and forced people to back down from their gloom & doom forecasts.

Nasdaq to NYSE Volume Ratio
Although I haven’t said much (or anything really) about this sentiment gauge, it is one of the oldest ones around. The theory is that the two exchanges represent different kinds of equity - Nasdaq was once the platform for unproven, young, and therefore, riskier listings and the big board, the place where all companies wanted to graduate to, the place where the largest, most stable corporations called home.

Of course, over time the difference between the two exchanges has been pretty much eliminated. But this indicator is still going on strong. So by following the ratio of volume on the two exchanges, we can gauge the level at which investors seek risk.

A spike lower in the ratio means that investors are fleeing Nasdaq stocks for NYSE ones and a spike up, the reverse. The most recent market decline in mid November saw this ratio dip to 1.20 - not the lowest it has been, but still very close to the 1.0 level which is the “uncle” point.

nasdaq nyse volume ratio Dec 2007

More importantly, with the exception of the spike low in November, the ratio has been scraping the ceiling. We’d have to go back more than 6 years to find similarly high readings.

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9 Responses to “Sentiment Overview: Week Of December 7th 2007”  

  1. 1 Johan

    “Although a 25 basis point cut is baked in, until we get confirmation, the market will probably not trend.”

    Is this really a fact that markets won’t likely trend before major news? I hear this all the time but haven’t seen any emperical proof for that.

    In fact major news are not even likely to change a trend (according to my own experience). Markets seems to go the way they want most often, and major news only changes the volatility not the trend.

  2. 2 Babak

    thanks for calling me on that. I don’t have any empirical evidence to back it up (including the “probably”) but it sure sounded good, didn’t it?

  3. 3 Johan

    Babak oh Babak! :) Since when did “it sounded good” give contrarians an edge? Aren’t we looking for what sounds bad? And fade what others think sounds good?

    I’m definately not saying that you are wrong, coz I don’t have any research to back it up with, but from a contrarian view “what sounds good” usually sounds bad.

    The obvious is rarely obvious, and common sense is not so common.


  4. 4 gosu

    I still believe the best indicator so far has been:

    Ratio of % of stocks above their 50 day moving average/Ratio of % of stocks above their 200 day moving average.

    This has been proven in this post.

    This ratio went to about 0.6 around November 16.

    Thanks to you, I was ready to jump in.

  5. 5 Babak

    Thanks gosu, that was a great call :)
    Glad you made some money on it.

  6. 6 Babak

    contrarian analysis isn’t about what sounds good or bad, it is about a lopsided crowding one way or the other. At least, that’s the way I approach it.

  7. 7 Johan

    Well, I think does things are the same thing or different sides of the same coin if you prefer.

    When things sounds too good, people crowd in. When things sounds bad, people shy away. That’s lopsided crowding.

    And most of the times when one scrutinize these seemingly logical, common sense hyopothesis they rarely give the output predicted.

    There’s another saying (there are many wise sayings out there), that markets are wired to do as much harm as possible to as many people as possible.

    That’s why John Doe always either lose or underperform. And it’s only a small bunch of people that take care of most of the winnings.

    Well, that’s how I see it.

    Now again we saw the markets rise into the FED meeting. I think there is actually a statistical significant winning to do buying before these meetings. That makes perfect sense in my contrarian view. When people are likely to have already sold stocks, it must be a good buying opportunty.

    May the odds be with us in our next trade!

  1. 1 Nasdaq vs. NYSE Volume Ratio: Spike Low
  2. 2 Nasdaq vs. NYSE Volume Ratio: Spike Low | yahoo web hosting

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