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Sentiment Overview: Week Of February 29th, 2008 at Trader’s Narrative

I don’t know how some get the impression that I’m a perma-bull. I’m human, so by nature I’m biased. However, what I try to do always is to allow the tools and indicators to speak for themselves.

For example, on Wednesday (February 27th, 2008) I wrote a cautionary note that based on overbought breadth of both the Dow Jones Industrial and the S&P 500, the mini-rally wouldn’t keep up the pace.

My hunch was that we’d schlep around until it worked off and then head higher. But in any case, overbought is overbought. When you have both the indices showing 80% of their components trading above their 10 day moving average, you have to rein in the longs and bunker down.

Dive, Dive, Dive!
But instead of meandering, the market worked off its overbought breadth by nosediving. For those keeping count, the last time the S&P 500 was down hereabouts was in early February but the breadth numbers were washed out. We had only 20% of stocks in the S&P 500 trading above their 50 day moving average. Now we have 31%. We had a measly 17.5% above their 200 moving average. Now we have 21%.

My point is that the market has rolled over (again) without first getting really overbought in anything over than the shortest time frame possible - the aforementioned 10 day moving average. I don’t like that.

CBOE Put Call Ratio
Something else which bugs me is that on Thursday when the market fell a fraction of today’s move, the CBOE equity only put call ratio spiked to 1.0 (or for the obsessive compulsives: 0.966).

But today, when red filled trading stations the CBOE ended up falling! It closed at 0.836 if you can believe it. So according to this gauge, the option traders aren’t afraid - even in the face of a 2.5%+ decline

This is odd, and disconcerting. Yet, it is part and parcel of the mystery that is the market. These counter intuitive days when the put call ratio walks with the index are rare but they do occur. Sometimes they paint a bullish picture and other times not.

put call ratio spx 500 Feb 2008

ISE Options Data
The ISEE index shows a more congruent picture with a dramatic decline in the number of calls relative to puts. Friday saw the ISEE index fall to 75 from 97.

That’s about as low as it got in mid February 2008 when the S&P 500 was trading slightly above Friday’s close. In contrast to the CBOE put call ratio, the ISE Index is saying that option sentiment is anything but apathetic.

Market Internals
How did we go from expecting a 90-90 up day to put a nice bow on the rally to getting a 90-90 down day? That’s what I’d like to know.

Maybe it was the short term overbought that I mentioned on Wednesday or maybe something else. In any case, we’ve been jarred from the slow and steady recovery from the January spike low with horrible market breadth.

Depending on which market data provider you use, we got anywhere between 2340 to 2400 declining issues on the Nasdaq and 2700+ on the NYSE. This has only been exceeded during this year on January 17th, when the market made its swing low.

Taking a quick glance at the graph of declining issues, I noticed that usually a low was carved out two to three trading sessions after such a spike high. Curious that it didn’t match such a wash out decline in breadth:

spx 500 compared declining isues Feb 2008

Hurts So Good
To leave on a positive note, the same short term indicator that that flashed a caution on Wednesday is now saying the opposite.

Of the 500 components of the Standards & Poor’s Index, only 13% are now above their 10 day moving average. This is low “enough” but if it happens to fall to less than 10%, without causing a concomitant fall in the indices, then the bulls are in for real a treat.

That’s because whenever we’ve had a similar deep oversold condition, even on such a short term time horizon, the market has rebounded strongly - see Lowry’s research.

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7 Responses to “Sentiment Overview: Week Of February 29th, 2008”  

  1. 1 D

    Perhaps I am overlooking something, but when I review this week’s sentiment review, I’m not seeing you taking a clear position on near-term, medium-term and long-term market prospects. Am I missing something?

  2. 2 Bill K

    I just found your website about a month ago. I am a 10 year long die hard practicing contrarian. We have been sharing the same views about the market for the most part over the last month. Your charts and information are very informative, clear and concise. I really like that fact that you are willing to put your bold calls out there. Regardless of what happens, that is rare. Most people prefer to tell you they knew something was going to happen after the fact or tell you that you were wrong after the fact. I have really enjoyed reading this website.

    Like you, I like to use technical and contrary information to put bold calls out there when everyone else is scratching their head trying to figure out what his happening. I also include fundamentals in my analysis.

    I sense that you might be starting to have a little doubt in this rally by your lessened conviction now as many of us have now or already had. I might be reading too much into that. But around the middle of last week I personally started to question if the January bottom is going to end up being the actual bottom, as I had earlier thought. The rallies have been on low volume. The 50DMA also seems to be putting a solid cap on the market since early Nov. This last rally last week was stopped right on the nose by the 50DMA on the Dow chart and intra day the S&P500 hit it perfectly too. But what is the most troubling for me is that obvious high fliers like GOOG and AAPL and others have continued to hit new lows. Usually when you put in a nice panic bottom the former obvious high fliers are the first to take off in a big way. In hindsight, the initial rallies after the panic lows in January seem like they might have been driven more by short covering. The financials had unbelievable bounces, which I couldn’t figure out at all and the short covering explanation is the only thing that really makes sense. They are now getting close to their lows again.

    Going forward, my new thesis is that the January bottom was a near term low and that we will break through that low to put in a new low. This just doesn’t have a feel of a panic low recovery to me at this point. I am a firm believer in climbing the wall of worry, but I think that we have surpassed a normal wall of worry to get to a point where there are too many huge issues in the economy right now with inflation, a sharply devalued dollar, deficits, lessoning interest from foreign investors, etc. Even U.S. investors are increasingly putting their money to work on foreign soil. I am, for the most part, excluding the trading range idea right now because we couldn’t get back up to around 1400 this 2nd run up on the S&P 500 and I think the 50DMA will continue to be a lid on the market in the near term. I am back to 100% cash and going to watch for all of the contrary information to tell us when a new panic low is in.

    Keep up the great work.

    Bill K

  3. 3 Black Crow

    Well, to be honest, I’ve been wondering too if we’ve seen the bottom or not. Actually I still believe to a certain extend we have. Why ?

    Well, give me ONE reason I would BUY or ONE reason I wouldn’t short !!

    That said, I think it’s obvious the market should go down, so obvious that everybody who wanted to sell or wanted to short has done that … or not ?? :o )

  4. 4 Bill K

    Black crow, your logic makes perfect sense. But when any pattern or market theory gets too well know it doesn’t work as well. I think panic bottom spotting has become much more widely used of late, then it was when I first started using it 10 years ago. Nearly everyone talks about VIX now and considers at least some other contrary indicators, which never used to be the case. Add to that the attempted market saving moves by the Fed when we were trying to put in panic lows. I really think we would have had a much more solid and probably lower bottom already in if the Fed didn’t try to give the market a big injection before the biggest down open day in years. Also, the government helping out homeowners in trouble is just delaying the inevitable pain that has to occur to clear out the housing market. The housing market has many ties to the stock market and the entire economy. These “save everyone” moves are not how markets have to work. They have to put in their own bottoms on their own time table and many people have to suffer to get the bottom in. The expansive knowledge of fear bottoms and the intervention of the fed have brought me pause regarding the January bottom.

    So the current buyers are the disillusioned ones that think the fed lowering rates is going to immediately turn everything around and fix everything, which usually is not the case. Also on board are the bottom picking crowd (which I was a member of until Wednesday of last week) that feel the fairly convincing bottom was real. Contrary bottom picking will still work, but we might need to see higher panic readings then we have seen to successfully put a long range bottom in.

  5. 5 Babak

    short term the market’s headed for (more) trouble, medium to long term I’m still bullish. The number of declines would suggest we are about to find a floor (see graph).

  1. 1 CBOE Put Call Options Ratio Spikes To Four Year High
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