Alright, here is the belated sentiment overview for the past week:
There was hardly a change in the LowRisk numbers with still about 57% bearish and only 32% bullish. The AAII bears increased to 59% while the bulls remained almost constant at 25%. So the retail investors are still very frightened - which is good from a contrarian perspective.
Although the bears increased and the bulls decreased, the Investor’s Intelligence survey of newsletter writers continues to be the “odd man out” because it is still showing more bullish sentiment than bearish (41.6% vs. 31.5%).
This dichotomy of sentiment between the newsletter writers and retail investors is rare but it has occurred before. Usually we can discount it because of the subjective method that II uses to come up with the results. But we have confirmation from the Hulbert newsletter sentiment indicators. So for whatever reason, newsletters have not thrown in the towel, despite the +20% market decline. This could be a fly in the ointment, unless we see them capitulate soon.
The CBOE equity only put call ratio spent several days above or at the 1.0 threshold (click for graph). With the short term market recovery, it has backed off to 0.67 - a neutral reading.
I prefer the ISEE Sentiment Index to the traditional CBOE put call ratio because it provides a clearer picture of the “dumb money”. By the way, when I use a term like that, I hope I don’t offend anyone. It’s just a word that describes a theoretical group of market participants out there.
Here’s a chart of the ISEE Index going back to early 2007:
The previous times it has come down as low as it did recently were very good times to be a buyer: early March 2007, August 2007 and late November 2007. Although we’ve recovered from those lows, as long as the ISEE doesn’t go too high too fast (above 150), we have the stage set for a continued recovery.
On the left, is the most recent Economist magazine cover page. The gloomy picture of a man bracing himself against a blustery storm with the superimposed red line showing the dropping stock market is a great negative image. I haven’t had a chance to read the accompanying article but the fact that they went along with this image and the title: “It’s rough out there” gives us all we really need.
To contrast that, Barron’s cover page is a bit more nuanced. Although it shows a bear captaining the ship of the market, a bull is about to “whack” it from behind with a baseball bat (ala Deniro). No doubt, this is a bullish cover and from a strict contrarian point of view, problematic.
But you have to remember that Barron’s is a specialized publication, written for and read by the financially literate. They were the ones that had many prescient covers, including the infamous “Dot Bomb” cover which presaged the bursting of the internet bubble. So I’m not in a hurry to see this as a bad omen.
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