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Sentiment Overview: Week Of February 13th, 2009 at Trader’s Narrative

Here’s this past week’s sentiment overview:

AAII Sentiment
The weekly AAII sentiment survey showed that 33% of respondents are bulls, up 8% points from last week. And 39% are bears, down 5% points from last week. Nothing really exciting here.

But something else that the American Association of Individual Investors monitors is how their members allocate assets within their portfolio: stocks, bonds, and cash. As you would expect, right now the average investor is shell-shocked and feeling risk averse. After dipping below the 2002 bear market low, their allocation to stocks has recovered slightly to appx. 45%.

Instead of seeking the shelter of cash, the average investor as measured by AAII, is plowing the money they took out of equities into bonds. So much so that right now they are allocating the most they have been since 1994. So consider this extreme bullishness in bond sentiment to be yet another rationale for a bubble in bonds.

Investors Intelligence
From the other sentiment survey, the newsletter editors continue to be an ambivalent lot for the most part. This week’s sentiment survey conducted by ChartCraft had 32.3% bulls and 38.7% bears. The bears are reasserting themselves but it is still too close for anything resembling a signal for contrarians.

OEX Put Call Ratio
Both of the options sentiment ratios that I usually monitor (CBOE put call ratio and the ISE sentiment index) are not telling us much right now. Fortunately, the OEX put call ratio is different. Although it is not as well known as the other two, I mentioned it before back on October 23rd, 2008: What’s up with this crazy options market?

OEX put call ratio jan 2009

Right now, this option sentiment ratio is even lower than it was then. In fact, right now the OEX put call ratio (10 day moving average) is lower than it has been for the past 20+ years. If you really wanted to find a lower reading, it would have to be Black Monday 1987.

Since the OEX options market is considerably smaller and it is generally believed that it is the playground of the ’smart money’, it is not interpreted as a contrarian signal when we have a preponderance of call buying, as we do now.

Hulbert Newsletter Sentiment
According to Mark Hulbert, the Hulbert Newsletter Sentiment Index (HSNSI) reacted quite unexpectedly to the Geithner press conference. Even though the market fell, HSNSI rose from -7.2% last week to +2%!

Mutual Fund Cash Positions
The more cash mutual funds hold in their portfolios, the more pessimistic the asset managers are. And more importantly, the more ammunition there is to continue the next bull market (when it starts).

From 2001 to mid 2007, mutual fund cash holdings continued to decrease - reaching an all time low at around 3.5%. As a result of the current bear market, the cash reserves have been increasing and are now around 5.2%.

But as Jason Goepfert brought to light, comparing the amount of cash over time isn’t very useful because at different times there are differing monetary conditions (interest rates, inflation, etc.). So he came up with a way to strip away these variables to allow for a historic comparison to be made. You can find his paper on this in the Free Trading Resource section (Charles H. Dow Awards folder).

Right now this standardized measure is showing that current mutual fund cash reserves are at higher comparable levels than the last bear market. But not as high as the early 1990’s.

focus money german magazine coverMagazine Cover Indicator
Thanks to a reader from Germany for pointing out an interesting magazine cover indicator across the pond. Focus Money’s current cover (on the left) shows a very dark map of the world with the word “VORSICHT” in red - meaning: Caution! or Danger!. And below it, ‘Weltwirtschaftskrise’, literally meaning ‘world economic crisis’ but mostly used to refer to the Great Depression of the 1930’s.

The previous weeks’ covers weren’t much more cheerful either. They promoted ’safe’ investments like gold, bonds, convertibles, fixed income funds, etc. Since Focus Money is usually a very cheerful and optimistic publication that pushes stocks, this is a rare occurrence. And it is even more significant when you consider that the last time Focus Money had such somber covers guiding readers away from risk was back in February of 2003.

Hedge Fund Exposure
According to data from Carpenter Analytics, hedge fund exposure is slightly net short, as it has been from early 2008. This correct net posture is not surprising when you consider the depth of resources and talent at their disposal. However, the current net short exposure is very small compared to what we saw in the same measure in the last bear market. On the plus side, hedge funds are now much less short than they were during the waterfall declines of 2008.

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3 Responses to “Sentiment Overview: Week Of February 13th, 2009”  

  1. 1 Bastiat

    Thank you as always for the overview. Greatly appreciated.

  2. 2 anonym

    A note of caution regarding the unusually low OEX Put/Call Ratio: the volume transacted in OEX options is very low right now. At bottoms in the past the low OEX Put/Call Ratio was accompanied by spikes in volume. I think the low volume is a sign that there is little conviction behind the call buying.

  3. 3 Babak

    Bastiat, you’re welcome. Thanks for the compliment.

    anonym, the volume has been trending down consistently. Had it been a sudden fall, I would agree with you. But I think there is still some value in this.

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