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Sentiment Overview: Week Of February 19th, 2010 at Trader’s Narrative

There’s quite a bit of data to go over so grab your beverage of choice before diving into this week’s sentiment overview:

Sentiment Surveys
The weekly sentiment survey from the AAII was little changed. Those expecting the stock market to be higher in 6 months lost almost one percent and dropped to 35.8%. Meanwhile the bearish potion fell even more (-6.7%) to hit 35.2%. So once again we are almost at a boring parity between the two sides.

The Investors Intelligence survey which measures the sentiment of stock newsletter editors was similarly boring this week. Both the bulls and the bears increased slightly from last week. The bulls are at 35.6% and the bears at 27.8%. We’ve seen a significant pullback in the extreme bullishness in the II at New Year’s but now it is basically in “no-man’s land.”

NAAIM Sentiment
We haven’t discussed this up and coming sentiment indicator in a while. By the way, if you’re unfamiliar with this indicator, see my introduction to the NAAIM survey of manager sentiment.

As you can see from the chart below, the average money manager was heavily long the market at the January high. The shallow correction we had was enough to persuade them to give up almost all their exposure on the long side:

NAAIM survey of manager sentiment Feb 2010

Their positions suddenly shriveled up to levels we hadn’t seen since July 2009, when the S&P 500 had an 8 handle.

Daily Sentiment Index
A few readers have been asking me for an update on the DSI so here is a chart of the S&P 500 with its accompanying DSI reading. For more information on the DSI as an indicator and how to use it: An Overview of the Daily Sentiment Index.
S&P500 compared to DSI Feb 2010 small.png
Source: RMG Wealth Management

Hulbert Newsletter Sentiment
According to the HSNSI which tracks the newsletters which attempt to time the stock market, the average newsletter is significantly less bullish now than last month. At the start of the year the HSNSI stood at 65.2% but after the correction that has dropped to just 20.3%.

To give you some perspective, 70% is the ceiling or “extreme” in historical context for this indicator. On the flip side, a level of -20% is very oversold (this is when newsletters are recommending a net short exposure).

ABC News/Washington Post Consumer Confidence
According to this indicator, the average US consumer is still very much in economic pain. The weekly consumer comfort index is -49 for the week of February 14th 2010. That is in line with the past few months and constitutes the largest stretch of negative sentiment for this indicator going back to the 1980’s.

ABC News Consumer Comfort Index Feb 2010
Source: Gluskin Sheff

Option Sentiment
I haven’t shown the option sentiment indicators which we usually go over every week because there was really no significant change from last week. Both the ISE sentiment index and the CBOE put call ratio were almost unmoved. For the really curious, you can check out the previous long term charts here.

If there is one fly in the ointment of “buy the dip” it is the propensity of option traders, and especially small or retail traders, to ignore protective puts. At the January 2010 highs we saw them completely ignore risk by eschewing the historic minimum of put buying. And then as the market corrected, they seemed to have reluctantly shuffled over and bought some puts but nearly not enough as I’d like to see to be able to confidently label this just a correction. But then again, perhaps it is too much to ask for all the stars to align perfectly.

Junk Bond Exodus
If you wondered what it takes to bring back some semblance of reality into the global markets, now we know. Apparently, all it takes is the risk of sovereign debt default from Greece (and in whispers, Portugal, Spain, Italy, Ireland, etc.) coupled with bright minds like Albert Edwards, the strategist at Societe Generale opining on the inevitable break up of the Euro. And bond investors suddenly discover the r-word. No, not retarded. Risk.

According to Lipper, investors are rushing out of high yield bond funds at the fastest pace since September 2005. In the most recent week they withdrew $984 million from US high yield bond funds - that is the largest net outflow in one week in more than four years and enough to push the four week rolling average down into net outflows (something we haven’t seen since March 2009).

As well, January saw the largest drops in junk bond prices pushing the spread between high yield bonds and “risk free” US Treasury bills from 100 basis points to 700 basis points.

Thanks to the “keep drinking to avoid a hangover” monetary policy philosophy adopted by most central banks, investors are parched for yield in a zero interest rate environment and have chased returns with little concern for risk. Flows into bond funds have outstripped all other classes but the fixed income thesis got a huge blow as net asset values for junk bond funds tracked by Lipper fell by $1.6 billion due to price declines.

While the high-yield bond sub-sector is getting rocked hard from the sovereign debt concerns across the pond, high quality corporate bond funds as well as government bond funds are continuing to receive consistent love from US retail investors. According to the latest ICI data for the week of February 10th 2010, they poured another $6.8 billion into the already sky-high pile of money they’ve invested in fixed income since the March 2009 equity market bottom.

Equity Mutual Fund Exodus
It doesn’t look like the junk bond stresses in fixed income are going to be enough to make US investors abandon their mass exodus from equities to fixed income. Not only has the inflows to bond funds continued with the same ferocity we’ve seen in the past few months, they are yet again withdrawing money from equity mutual funds.

According to the latest ICI data (for the week of February 10th 2010) investors withdrew $5.1 billion from US equity mutual funds. Even foreign equity mutual funds which had been spared, for the most part, saw withdrawals of almost half a billion dollars.

Corporate Insiders
While the shallow correction we just had was rather foreseeable it was enough to spook a lot of newsletters and money managers. But it wasn’t enough to negatively affect the pattern of insider activity. In fact, not only did corporate insiders not accelerate the selling of their company’s shares as the market fell, they actually slowed down the pace of selling and increased their buying.

According to Argus Research, in mid January 2010, insiders sold 5.15 shares for every 1 share they bought. A month later they sold just 2.42 shares for every 1 share bought. According to this metric, what we just witnessed was a healthy and normal profit taking correction instead of a crack in the cyclical bull market.

Things are even more bullish for small cap stocks. According to, corporate insiders from small capitalization companies (Russell 200 index constituents) took advantage of the recent price decline to back up the truck. The first week of this month saw the biggest burst of insider buying since March 2009.

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24 Responses to “Sentiment Overview: Week Of February 19th, 2010”  

  1. 1 jezza

    This is a great blog, but I believe you would raise your credibility if you stopped quoting EWI, they constantly make such bad calls, that if you had followed them you would have lost allot of money, just recently called a slump in equities to below March 2009 low, gold to collapse, with 100% certainty..oh well.. etc..-once in 10 years they are right, we can all do better than that.

    Give them a miss, they just confuse clarity of thought!

  2. 2 J.Martin

    EWI is detrimental to your financial health. And EW itself is useless. Proof is out of hundreds of EW “experts” no one ever agrees and they always have a second alternative “maybe” . USELESS.Agree with JETTA.

  3. 3 Babak

    jezza and J.Martin, were you bullish on early March 2009? did you buy with both hands? I don’t know but I’d be happy to hear that you were and did. I do know that EWI was one of the very few services out there that caught the cyclical bull market. Are they perfect and do they catch every single move in the market? No absolutely not. No one is and no one does. You’re welcome to give your patronage to whatever market framework you choose, but allow others the respect to do the same.

  4. 4 buddy guy

    agree, ewi is crap and makes this blog look dumb. they should ditch it. markets do not move in 5 waves, there is absolutely no scientific grounding for that hog wash. try this out, see if you can spot the elliot wave structure at random samplings, good luck lol.

    death to ewi, long live everything else!

    babak is probably paid by ewi, my guess.

  5. 5 Babak

    buddy, through out my short stay here on this blue ball I’ve learned that it is those that throw around ad hominems that usually end up looking dumb. The smart cookies are those that use whatever tools are available without giving up their ability to think for themselves. That’s how I approach EW. I don’t necessarily follow whatever they say like an automaton and don’t believe anyone else should either. Perhaps the fault lies with those that approach tools like it as a crutch.

    This is a peculiar trait of online discussions. I don’t think any of the above commentors would be so uncivilized as to arrived to a house party only to then go about criticising the decor choices of their host.

    Finally, I’m reminded of S. T. Coleridge’s classification of the 4 kinds of readers:

        sponges — those who absorb all they read and return it nearly in the same state; only a little dirtied
        sand-glasses — who retain nothing, and are content to get through a book for the sake of getting through the time
        strain-bags — who retain merely the dregs of what they read
        mogul diamonds — equally rare and valuable, who profit by what they read, and enable others to profit by it also
  6. 6 jezza

    Babak, with respect I don’t go to house parties for financial advice on how to grow my capital, but i do read financial blogs/sites for that purpose.

    Agreed, EWI made a good call in March 2009, since then they have been 100% wrong

    This has been EWI pattern for the last 10 years or so, 1 or 2 good calls, followed by multiple very bad calls, year after year.

    R.Prechter is dangerous to your wealth, and can confuse your thought process which as we play 3D chess with the Macro enviroment, is complicated enough.

    Drop him-stick with the practioners who deliver!


  7. 7 Babak

    jezza, so I guess that’s a no then. you weren’t bullish in March 2009 and you didn’t buy while EWI did and they were correct. To be clear, I’m not dispensing financial advice. I’m just sharing my thought process as I try to make sense of the markets. If that helps others, then great. Most of the time, it is the other way around as my readers help me. Everyone is free to make up their mind about things. Spouting ad hominems and absolutes which contradicts evidence doesn’t make for a good case.

  8. 8 jezza

    Babak, lets agree to disagree, I will just switch off when ever EWI comments.

    PS.Not really relevant but went long equities in May 2009, and ignored EWI bearish calls ever since, remain long equities, and long Gold, also contary to EWI.

    Keep up the great site, Babak, but it might be a good idea to listen to your readers from time to time.

  9. 9 Babak

    jezza, comments, suggestions, etc. are all welcome. I have no problem listening to my readers but I will push back when someone tries to act like a bully to dictate how things “should be”. If you don’t like a certain market framework that’s fine by me. I don’t force you to use it. Likewise, I expect you to respect others when they choose to do so. Now, can we get back to some more interesting discussions on the market? :)

  10. 10 housing bear

    Babak, keep up the good work. EW is an interesting way of looking at the market, even if it is not always accurate.

  11. 11 buddy guy

    I did a coin toss that told me March 9th was the bottom too. Lol!

  12. 12 buddy guy

    Whenever I read stuff like this, I just scratch my head and shrug, why are some people so enamored by those silly waves?

  13. 13 wayne

    Hey Anti Prector Guys,

    In the movie the Godfather, Don Corleone warned his son Michael, “Keep your friends close, but your enemies even closer”. If you are convinced that Prector, or any other source of information, is predictably wrong, would it not serve you well to keep a close eye on it’s guidance, so that you can rest assured that it doesn’t agree with your own perspective?

    Babak provides an incredible amount of information at a very affordable price. Maybe we shouldn’t look a gift horse in the mouth.

  14. 14 spencerfrater1

    At-a-boy! It’s good to get some emotion flowing…
    First off Babak, I think your blog is extremely useful and I’ve learned a lot from it. One of the few I really enjoy and keep coming back to on a regular basis.
    I also agree with the other posters that the elliott wave stuff is pretty much all rubbish, but Wayne makes a very good point (as always) - let’s just be aware of what EWI are saying. What I don’t particularly like is the commercial bent of the EWI - always trying to get you to buy stuff. But it’s our perogative whether we do actually part with any money, and the irritation is a small price to put up with for this fantastic blog. Keep up the great work Babak! Just my 10c worth.

  15. 15 housing bear


    Elliott wave analysis is illuminating for long-term index (e.g. S&P) charts and gold. It is just one of several indicators of course.

  16. 16 wayne

    The Internet Phenom

    Babak and readers,

    If you have access to it, you may enjoy Alan Abelson’s column this week “The Big Stall”. He weighs in on several subjects, Soros on Gold, Rosenberg on Canadian Housing but thirdly , the internet phenom which allows anyone and everyone to anonymously voice their opinion. I think you will find some of the comments posted to the article by some of your colleagues in the blog business interesting. I’ll give you the leadin to his story and you can spring for the paper if you want more more.

    “AN OLD FRENCH PROVERB DEFINES PUBLIC OPINION as when everybody knows better than anybody. And that’s especially true these days when, thanks to such miraculous contraptions as the Internet and Twitter, all you need is a keyboard and one finger to register your opinion on anything and everything under the sun and whatever’s above it as well.”

  17. 17 Babak

    Something else to keep in mind is that EWI is much more than just elliott waves. They also offer sentiment updates on the DSI and other indicators as well as really interesting commentary on socionomics. It is up to every trader to decide obviously but again, bullying others into not following a certain framework is just silly. Live and let live.

    As well, this tempest in a teacup reminds me of the end of year trading strategy which I picked up from a book that many trash as “worthless”. I find this hilarious as I’ve made a good 5 figure sum off this book (and counting).

  18. 18 dhath

    hi - Babak, good work. This is a weekly check for me. You hit singles and that’s damn good.

    Interesting commentary on elliott wave. look, horoscopes are idiotic and still around - why? lots people pay attention to them and therefore they matter on some level. check thurs Feb 18. Around the 61.8 retrace market goes balls to the wall. It’s stupid, maybe I rationally hate it but do I dismiss it? No, not unless I’m that guy that has to be seen as the smartest in the room by crapping on the fortune teller in the corner.

    Don’t be that guy. check how luck has been statistically defined. Babak, keep your filters wide and punching out those singles.


  19. 19 Babak

    dhath, weekly? weekly??! I’ve never been so insulted in all my life!


  20. 20 MachineGhost

    Oh my favorite topic!

    Elliott Waves just happen to show cycles and is “right” when it coincides with a major top or a bottom in hindsight. Beyond that, the EWI track record has been abmysal all the way back to before 1987. Lots of timing indicators flashed a buy in March 2009, EWI was not some stellar exception. What was an exceptional was the dearth of people writing about it being a bottom. Even I thought it was a bottom but lacking previous experience with the market timing indicator I had coded up a few months before prevented me from acting due to lack of certainty. But one could write about every potential bottom and look like a genius in hindsight when it hits.

    Anyhow, the Elliott Wave methodology has already been quantified, invalidating and validating the 70 -year old rules and those outfits like EWI that choose to ignore such research in favor of subjective application is likely the big reason for their awful accuracy. But, they are a journalistic business, not traders, so what do they care? The money will still roll in from the n00bs that believe gurus are the way to wealth.

    I do roll my eyes constantly at all the EWI crap posted here. Although highly annoying to do so, I at least skim the posts just in case there is a rare nugget of insight. :-)

  21. 21 Fibocycle

    I have ‘followed’ EWT for many years–since the early 1980s. I have found that when used alone it can be a very expensive way to trade markets. However, I have noted that when many ‘orthodox’ technical indicators are signaling a bottom–or top– like seen in early March of 2009 Elliot Wave is often in agreement and can help in confirming ones suspicions of a market pivot.
    The basic works of R.N. Elliott are intriguing and merit serious consideration in analyzing market movements. Chaos theory and Fractal theory is is a very compelling method of attempting to figure out what markets are doing as well–since they are all related. However, the standard 5-3-abc wave structures have been empirically discredited ad nauseam even though Mr. Prechter makes an art form of hindsight in promoting his methods. Sensationalism sells!!!!!!
    I have found that after working with fibonacci sequences and ratios for 30 years that projecting these ratios can be VERY accurate in ascertaining ‘energy points’ in market movements. EWT is very instructive in this area. PHI harmonics in both time and price has certainly contributed to me being highly mindful of potential market pivots.
    It is fine to use market structure methods to trade markets but experience has shown me that they are at best excellent tools to indicate times when potential trend changes can occur–the most reliable methods are usually the simplest–RSI–Candlesticks and EMAs.
    Perhaps the most repugnant thing about EWT is the relentless and sensationalist marketing–it approaches the absurdity of Goldline and other two-bit scams. Be professional Mr.Prechter–and you will maintain a decent reputation–succumb to mass marketing schticks and you will lose credibility quickly. When Glen Beck advertises for you I will know that you have hit major low.


    I appreciate the EW stuff Babak - particulary Robert Prechter as opposed to his employees.

    Think people need to be very careful to distinguish between their different services.

    EWT, a monthly publication is Robert Prechters personal output and is long term in nature.
    eg He advised closing shorts late Feb09 [but not going long, as he thought it too risky].
    Gave a range target for the bear rally, more accurate than anyone else I know.
    Has been instigating Shorts again recently.
    He tends to be very quiet between these major turning points eg this month I think a single sentence covered his stance - basically saying unchanged, then he delved into some theroy.

    Beleive Hugh Hendry reads him regularly - that says an awful lot - he is anything but a fool.

    Beleive is completely different to EWI which is a daily service - it is this service’s stats which I beleive to be quoted by Hulbert as very poor. They are very short-term in nature.

    Would prefer to say a lot more, but got 2 young kids shouting on me.

  23. 23 Fibocycle

    Making the distinction between R.P’s work (EWT) and EWI is quite valid. I have followed R.P’s work for several decades and have read both his book “The Elliott Wave Principle” and Robert Frost’s book repeatedly. Mr. Prechter does fine work–most lately his insightful work with regard sociological issues is an invaluable tool in assessing the prevailing collective mood. I have found that his sociological observations and the thesis of The Fourth Turning by William Strauss and Neil Howe to be very congruent views on contemporary society and the deteriorating ethos in liberal democratic culture.
    It is unfortunate the the spam-kings over at EWT tarnish his reputation by acting like a Vince @ Sham WOW !!!!!!

  24. 24 Babak

    Thanks Paul. A lot of institutional traders on Wall St. read and follow him - much more than would publicly admit. Did you know that Paul Tudor Jones II was able to predict the crash of 1987 and profit from it (and make a name for himself like Soros against the British Pound) with the help of EW theory? It is all there in the video which he’s tried his best to eliminate from public viewing. I have the video “Trader: The Documentary” and watch it every once in a while. Anyway, have a great weekend.

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