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Sentiment Overview: Week Of January 18th, 2008 at Trader’s Narrative

My continued bullishness may be seen by some as stubborn, but after looking at the sentiment out there, what other position can you take?

Option Traders Freak Out
The ISEE index recovered from a low of 60 - a low enough level to show severe panic in retail option traders. Although we don’t have long term data for this ratio, the data that we do have indicates that this is low enough to stoke a rally or at least halt a decline.

The more traditional CBOE (equity only) put call ratio once again came in near 1.0 today - this is the third time this week that it has been above or just at parity. In the past 4 years, we’ve only seen parity broken a handful of times. But to see a grouping of such high put call ratios is highly unusual.

I think it is safe to say that option traders, and especially the least experience and least capitalized of them (retail) are in full freak out mode:

cboe put call ratio jan 2008
spx 2004 Jan 2008 daily chart

Sentiment Surveys
The only traditional sentiment measure that is not showing excessive bearishness is Investor’s Intelligence with 45.6% bulls and 26.7% bears. A few people have asked me about the disparity between it and other sentiment indicators. Honestly I don’t know what is really going on but as I’ve said before, you have to understand that it is very different from other measures.

For one, newsletter writers are a generally more optimistic bunch (since bullishness sells better than its counterpart). Second, II is tabulated through the subjective thinking of one person, Michael Burke. He categorizes newsletters as either bulls, bears or neutral from not necessarily their portfolios but also what the writer is saying. Since the newsletters can’t themselves, in effect, “vote”, this measure is open to the personal bias of one person.

So maybe that explains the discrepancy or maybe it doesn’t. In the end, it is one measure among many. I’d rather take the general judgement of the group, than single out any one of them.

LowRisk’s recent 30 day outlook is decidedly gloomy with 56% bearish and 32% bullish. Market Vane’s bullish percent dropped to 48% and although that sounds too high already to be bullish, you have to consider that for the past 4 years, it has oscillated between 75% and 55%. Likewise, Consensus‘ bullishness is at 47%.

AAII is showing panic-level bearishness again with 54% bears and only 24% bulls. Check out last week’s chart to see the correlation between such high bearish AAII sentiment and stock market performance.

According to Jason Goepfert, waiting two weeks after a bearish percentage above 50% gives us a better chance of finding a winning trade: 24 from 29 instances with an average return of +3.1% (over two months). He also says that the “average drawdown (i.e. maximum loss) of -3.2% was dwarfed by the average maximum gain during the trades of +5.7%.”

Rydex Ursa/Nova Ratio
Before leveraged ETFs, the only way retail traders got long or short aggressively was through the Rydex Nova/Ursa funds. Although they have become somewhat of an anachronism, their ratio is still useful to show the retail investor’s mood.

Not surprisingly, we are seeing a dash into the bearish leveraged fund (Ursa) as the “dumb money” goes into panic over the recent market losses.

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10 Responses to “Sentiment Overview: Week Of January 18th, 2008”  

  1. 1 Z

    Do you even trade?

  2. 2 Babak

    if you define ‘trade’ as getting my ass handed to me ;-)

  3. 3 Tom

    Have you bought anything yet and would you let us know what you did buy?

  4. 4 wes

    Well, the two week period from the time the bearish percentage first rose above 50% expired this past Wednesday.

    I believe there is also a two week waiting period on the first time the ARMS goes above 1.5. That two week period expired Friday.

    So, this coming Tuesday will be the first market day to satisfy both two week waits simultaneously.

  5. 5 Scoad

    Another sentiment bell started clanging at the end of the week with Jim Cramer predicting a 2000 pt drop if the Fed doesnt adopt his bailout plan for the bond insurers and a 2000 pt rise if they do. With ” El Capitan” as his mate Doug Kass calls him, shrieking about the abyss you’ve gotta wonder if its time to sleep out under the eves like, I think it was the Miller in Chaucers ” Canterbury Tales ” or plunk your magic twanger froggy and hit the flaming ” buy Buy BUY ” button.

  6. 6 Z

    Those stats are way too scarce to built any strategy upon.

  7. 7 Scoad

    Here’s the fear- is it enuf? Lord Keynes is this mkt rational? It’ll be interesting to see the levels of the varios sentiment indicators after today.

  1. 1 World Stock Markets Plunge While US Markets Closed
  2. 2 Market Recovers By The Skin Of Its Teeth
  3. 3 Financial News » Blog Archive » Market Recovery Continues, but Few Believe in It

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