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Sentiment Overview: Week Of January 4th, 2008 at Trader’s Narrative

I was busy on Friday and couldn’t post this at the usual time. Here is the weekly sentiment roundup:

Sentiment Surveys
Fear gripped the respondents to the AAII survey last week as bullishness plunged to 26% (from a recent high of 47.62%) and the bears, meanwhile, catapulted to 55%. Whenever we’ve seen this much bearishness, it has been a good time to buy. Click here to see a chart of what the S&P 500 does historically after similar AAII readings.

Surprisingly, the Investor’s Intelligence survey (which is one person’s judgment on the sentiment of newsletter writers) shows the opposite: 52.2% bullish and only 24.5% bearish. Personally, I’d rather go with the gauge that relies on the response of thousands (instead of one). Especially as the other sentiment indicators dove tail it so well.

(Mutual) Fund Flows
Data from TrimTabs corroborates the shocking hemorrhage in the mutual fund industry I wrote about before. According to them, 2007 saw probably the largest outflow in history.

I still have no idea what is going on here. And it is a bit strange that no one is really talking about this in the media. It does fit in with the retail investor’s sentiment and from a contrarian point of view, it is very bullish. Take a look at this graph sent in by a reader. It puts this into historical context:

Click to Enlarge
mutual fund flow graph article

Option Traders
Last week, before the market sold off, I wrote a cautionary post: Retail Option Traders Tad Too Giddy. And right on cue we saw the result of that “giddiness”.

Option traders have backed off, a bit. The CBOE put/call ratio is now almost 0.7. And the retail traders, as measured by the ISE Index, dropped from 168 to 93. These are not “buy zone” levels but as the market digests the loss over the weekend, I think we will see an expansion of the panic that seems to have started - which will provide those levels.

Insider Buying
The legal kind, is off the charts. According to various sources that track what corporate insiders are doing, they are scooping up shares hand over fist. They’ve been on a buying spree pretty much since last summer and have never become net sellers (yet).

Commitment of Traders
The commercial players in the futures market (the most well funded and knowledgeable of the bunch) have significantly stepped back from the record COT net long position they had last summer. The best I can say is that things aren’t as wildly bullish as then. But they are somewhere near the middle - no where near net short.

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