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Sentiment Overview: Week Of July 3rd, 2009 at Trader’s Narrative

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Here is the sentiment summary for this shortened holiday week (Happy belated Canada day and 4th of July!):

Investors Intelligence
Stock newsletter editors were on average unchanged from last week: bulls 41.4% and bears 29.9%.

The weekly retail investor sentiment survey from AAII shows a sudden jump in optimism: the bulls came in at 38% - a 10% point jump from last week. While the bears are 45% of respondents, a drop of 4% points from last week.

It is difficult to parse the meaning of this move back and forth. First much more bearish, now decidedly less so. Since we didn’t really reach any levels of historical significance with this sentiment indicator, the only thing we can safely say is that retail investors are skittish but not despondent.

Barron’s Confidence Index
This is among Richard Russell’s favorite indicators. The Barron’s Confidence Index is a ratio between Barron’s high-grade corporate bond index and Barron’s intermediate-grade corporate bond index. So basically it shows how much or how little demand there is in the more speculative, lower grade bond market.

The lower the Confidence Index, the less inclined people are to accept risk in the bond market and the higher, the more they are willing to take on risk. Historically 60 has been considered an extremely low level. But as you can see, we easily sliced through that level during last year’s credit market turmoil:

barrons confidence index july 2009
Source: Plexus Asset Management

But since the low late last year, the credit market has improved and we are now trying to return to normalcy. There is a high correlation between this indicator and the equity markets, which is why Russell follows it so keenly. It can be considered a good proxy not only for the bond sentiment but for the over all appetite for risk. There are many indications which confirm this point of view, for example the return to earth of the TED spread.

You can follow the indicator by rifling through the pages of Barron’s print edition or you can alternatively find it online.

Magazine Cover Indicator
business week retirement coverThis week’s magazine cover sentiment comes courtesy of Business Week, purveyor of many fine contrarian cover indicators in the past. This week’s cover asks:

Can You Afford to Retire?
After watching their savings evaporate and their net worth plunge, many are giving up on retirement planning.

The graphics is a clever play on the falling stock market, in a thick red line… which transforms into a beach lounge chair.

On the whole it isn’t ’slash your wrists’ or ‘Death of Equities’ gloomy but you have to wonder if this kind of cover would have even been contemplated in 2007.

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