Trader’s Narrative

Here is the sentiment overview for the first week of 2009:

ISE Sentiment
On Monday I mentioned that the option traders on the ISE were shockingly optimistic, going long more than twice the number of calls than puts. Things quickly calmed down and the ISE sentiment ratio fell closer to parity at 123.

On the plus side, this resolved the “quietness” that had fallen over this options market. The range contraction of the ISE is no more. But to be honest, I was imagining it being broken to the other side.

The short term moving average (10 day) of the ISE sentiment ratio continues to be too high - reflecting a worryingly lopsided demand for call options by retail option traders.

CBOE Put Call Ratio
The traditional ratio measuring option activity spiked to 1.07 on January 7th and then fell again. I’m not sure if we can attribute too much meaning to this. Especially when the over all picture of the CBOE put call ratio is still one of optimism.

AAII Sentiment
The American Association of Individual Investors released their sentiment data for this week: bulls jumped sharply to 48.70% (from only 24% last week) and bears were only 35.06% of respondents (compared to 54.67% from last week).

Clearly we are seeing the average American retail investor jump on the bandwagon of hope.

Investor’s Intelligence
According to Chart Craft, this week’s Investor’s Intelligence sentiment survey shows 41.8% bulls and 34.1% bears.

We’ve watched a continuous increase in bullish sentiment from this indicator for the past few weeks. Specifically, this is a slight increase since the last week of 2008 when both bears and bulls were both equal at 38.5%.

As well, the last time we had more bulls than bears was back in August 2008 when the S&P 500 was trading at 1300. It was a momentary blip of exuberance but we all know what happened after.

You can see this on the chart to the left.

Hulbert Newsletter Sentiment
The Hulbert Stock Newsletter Sentiment Index (HSNSI) measures the optimism or pessimism of market timing newsletters. The “Santa Claus” rally added to the gains of the S&P 500 since November’s low, taking us 20% higher and technically into a new bull market.

According to Mark Hulbert, the HSNSI was at -18.9% when the S&P 500 hit its November 2008 low. This means that the average market timing newsletter was advising their clients to be short the market with that portion of their portfolio. But as of this week, they are now suggesting a +43.5% allocation (long).

Although we need people to get bullish (eventually), this is just way too much too fast. The ideal situation from a contrarian viewpoint is to see reluctance or disbelief after a rally. That’s not what we are seeing (from this metric at least).