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Sentiment Overview: Week Of June 11th, 2010 at Trader’s Narrative

We have a lot to cover in this week’s sentiment overview:

Sentiment Surveys
The weekly sentiment survey from AAII shows little change from last week: 34.5% of respondents identified as bullish, believing the stock market would be higher in 6 months while 43% believed it would be lower. The tilt towards pessimism (a light increase in bears combined with a slight decrease in bulls) pushed the bull ratio to 44%.

Since it is neither low (30% or lower) nor high (60% or higher) it doesn’t really provide much edge. The lowest level for the bull ratio was 37% two weeks ago in late May. That was lower than the corresponding bull ratio at the bottom of the February correction but still not at an extreme.

Investors Intelligence
A similar shift took place in the sentiment survey of newsletter editors by ChartCraft. This week’s II shows a slight decrease in bulls (38.5%) and a slight increase in bears (31.9%). That brings the spread between the two camps to the smallest gap since February. As well, the bull/bear ratio is now 1.21:1 lower than at the end of the February correction, when the bull/bear ratio stood at 1.30:1.

Hulbert Newsletter Sentiment
Another measure of newsletter sentiment is showing even more considerable signs of surrender. According to Mark Hulbert, the average recommended equity exposure by newsletter editors who attempt to time the stock market has collapsed from +65.5% on April 23rd (when the S&P 500 closed at 1217.28) to -8.8% earlier this week when the S&P 500 closed at 1050.47.

That is a 74.3% point swing for the Hulbert Stock Newsletter Sentiment Index (HSNSI) in a little over a month and it takes the recommended exposure below neutral to actually being short the market. Late last month during a previous weekly sentiment overview we also looked at this same metric for the Nasdaq market and noted that it had fallen to -45% (recommended exposure of almost half the portfolio being short the Nasdaq).

It is important to keep in mind that from a long term perspective, the -8.8% exposure isn’t extremely low. The HSNSI has been much lower of course. But the question is whether this is a correction or the start of a bear market. If it is a correction, then we are certainly low enough to provide a contrarian sentiment floor under prices.

This is especially clear when we compare the much more bearish viewpoint that stock timing newsletters have today with the February correction. Back then, the lowest level that the HSNSI fell to was +13.8% (before recovering higher along with stock prices)

NAAIM Survey of Manager Sentiment
While the market went mostly sideways, the active managers measured by the NAAIM survey showed a reluctance to buy this “dip”. This week they’ve finally stepped up and increased their average exposure to the market.

The move however is relatively small, taking their average portfolio exposure to 34.8% (from 27% last week). The median NAAIM index also went up slightly to 30% from 27.5%. It is natural to see money managers increase their long exposure as the market goes up, as a contrarian, my only request is that they do so with trepidation, not with excitement.

Here is the chart of the (median) NAAIM Survey:
NAAIM survey of manager sentiment median Jun 2010

While managers have decreased their exposure during corrections within the cyclical bull market, they are still on average more bullish than they were during the corrections during the bear market.

Short/Long Term Composites
While the Investors Intelligence aggregate measures (Short Term Composite and Long Term Composite) are not purely sentiment gauges, they do include several inputs from sentiment surveys. Check the previous discussion of market climaxes to see the remarkably low depths that both of these indicators have fallen to.

While stock prices may have corrected “just” 14%, many technical and sentiment measures are showing a remarkably more intense break lower. The bears will interpret this as a weak market while the bulls will see this as capitulation built on a very light pullback.

Consumer Confidence
The increase in consumer sentiment from the June Reuters/Michigan University survey surprised almost everyone. While this is only a preliminary result which may be revised downwards, it shows a continuing recovery. The Consumer Sentiment index rose to 75.5 from 73.6 in May:

consumer sentiment Reuters-Michigan survey Jun 2010

The Conference Board’s Consumer Confidence index has also continued to recover. Here’s the chart of the expectations sub-index as of late last month:

consumer confidence expectations Jun 2010

Rydex Ratio
The Rydex ratio is showing a very fast trip from extreme bullishness (in April 2010) to today’s significant bearishness. We are well past the low Rydex ratio levels at which previous corrections ended (February 2010, and November 2009) but not yet at the level that correspond to the July 2009 correction nor the depths that killed the bear market:

Click to see larger version in a new tab:
rydex ratio long term chart jun 2010

Perhaps even more noteworthy is the propensity of the Rydex market timers to rush into the inverse S&P 500 index, swelling its assets to $371 million. Here’s a chart, courtesy of SentimenTrader, showing the inverse S&P 500 Rydex fund and the corresponding levels for the S&P 500 index itself:

Click to see larger version in a new tab:
rydex inverse assets sentimentrader Jun 2010

Once again, we have to make a distinction between merely a correction and a potential (new) bear market. Whereas the July 2009 and February 2010 corrections were great buy points, the October 2008 instance was not. So while we are not stretched to the extreme breaking points in the past, Rydex traders are exhibiting quite a lot of concern which is bullish from a contrarian point of view.

Corporate Insiders
Last week we looked at the sell-to-buy ratio for corporate insiders which had fallen below the February correction lows. According to Vickers, that was a one week anomaly with data returning to rather less optimistic overtones.

Taking a more lengthier view, over the past two month’s time, corporate insiders sell-to-buy ratio has averaged 3:1. This is close to what we saw during the 2003-2007. The recent increase in sales isn’t terribly bearish because insiders can not be considered perfect timing models.

Note that the chart below is using data from Thomson Financial and as a result providing a slightly different picture:
insider transaction ratio Jun 2010
Source: Barron’s

Labor Market
Returning to our discussion of Non-Farm Payroll data, especially the terrifying chartfor the mean duration of unemployment, there is another glimmer of hope.

According to BLS almost 2 million people quit their jobs in April - a high going back more than 2 years. In comparison, 1.75 million were given no choice and fired in April - the fewest since January 2007. Obviously, people quit their jobs when they have confidence in their financial health or in their ability to get a better job elsewhere. This also confirms the growing consumer confidence (see above chart).

For more, see: More Employees Say “I Quit” as Economy Improves.

Remember Stock Splits?
If you’re new to the market, you’re forgiven for not remembering stock splits fondly. These were non-events that during the tech bubble would trigger huge ramp-ups in stock prices. I even had a friend who would almost exclusively trade splits. The game was fun while it lasted but it was easy to mistake a bull market for skill.

The chart below shows the dwindling number of stock splits within the 500 constituents of the S&P 500 index:

stock splits S&P500 constitutents Jun 2010
Source: Bloomberg

This is merely a reflection of the market, much like the historical trend in IPOs. So it is difficult to wring any real insight out of it, beyond the very obvious.

Share Repurchases
Corporations are putting their cash hoards to use. After sitting on their accumulating cash for the better part of a year, corporations are starting to reward shareholders by re-purchasing their own stock. On an annualized level, the pace is about to equal what we saw in 2008:

corporate annual buybacks Jun 2010
Source: Buybacks tell a bullish story

The fact that boards are increasing such programs this year speaks of their confidence in the economy, whether misplaced or not. Obviously if they foresaw a cash or credit crunch, they would conserve their liquidity. To play Devil’s Advocate, corporations are horrible market timers. They usually buy at exactly the wrong time. As you can see, the high corresponds with 2007 and the low with 2003 and 2009. For now, we are not yet at an extremely high level, so buybacks can indeed push the market a bit higher.

Option Sentiment
The ISE Sentiment index showed an intriguing level of skepticism this week. Although the S&P 500 index ended the week by closing 40 points higher than its lows, the short term smoothing average of the (equity only) ISE sentiment index fell from 152 to 144.

Option traders on the ISE didn’t really participate in Thursday’s sharp move higher since that day’s ISE sentiment index was a subdued 144. And Friday’s higher close, less exuberant but still a positive close, was met with even more nonchalance as the ISE sentiment index closed at 113.

ISE sentiment 10 day moving average Jun 2010 update

The last time the 10 day moving average of the ISE sentiment index was lower was during the last days of June 2009.

The CBOE’s (equity only) put call ratio also moved higher but not as much as the ISE sentiment index. The smooting average bounced higher from 0.60 to 0.64 registering slightly more fear. But the swing highs (0.70) are well behind the ratio - these were late May and mid-February 2010:

cboe equity only put call 10 day moving average Jun 2010 update

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4 Responses to “Sentiment Overview: Week Of June 11th, 2010”  

  1. 1 hugo

    Thank you very much for your sentiment report. Is one of those few useful things I can find at Internet and be of real application to my trading.

  2. 2 Rob

    I second the prior comment - this is a highly valuable summary. This site is becomming one of my favorite daily ‘must read’ sites.

    A quick comment - the Consumer Senitment chart is particularly interesting. Although it’s been recovering steadily since the lows of 2009, it is still well below the levels of prior economic expansions. I guess one could read this as a bullish sign that we have further upside potential, but one could also see this as weakness underlying the current GDP growth. Combining this with the Consumer Metrics Institute data, I lean toward weakness as the interpretation. That said, I think the current correction has bottomed and we’ll see another rally aided greatly by short covering.

  3. 3 Wes


    This is one of the finest free stock market sites on the internet. I congratulate you.

    I have a personal favorite as sentiment indicator of the week, and it hasn’t been mentioned. On Monday, as the S&P was falling to a recent closing low, the OEX option traders (these are the smart option traders) recorded an exceptionally low put/call ratio in the mid 60% range.

    That level of call buying by the smartest option traders in the market while the indexes were falling all day speaks loudly to their confidence in the immediate future.

    I think that may be what is called a “tell”.

  4. 4 dave.d

    “To play Devil’s Advocate, corporations are horrible market timers. They usually buy at exactly the wrong time.”

    Research disagrees

    From the abstract:
    “[T]he returns of stock investors depend not only on the returns of the securities they hold but also on the timing of their capital flows into and out of these securities. This paper suggests a new and more accurate measure of stock investors’ historical returns, which involves dollar-weighting of the returns and properly reflects the effect of investors’ timing. … The empirical results indicate that aggregate dollar-weighted returns are systematically lower than buy-and hold returns. The annual difference is 1.3 percent for the NYSE/AMEX market over 1926-2002, 5.3 percent for Nasdaq over 1973-2002, and averages 1.5 percent for 19 major stock markets around the world over 1973-2004. Thus, this study provides comprehensive evidence that stock investors’ actual returns are considerably lower than those from passive holdings and from those documented in the existing literature on historical stock returns.”

    In other words, it is investors who the bad timers; companies issuing and retiring stock have conversely done well over the long history of the market, notwithstanding the recent decade. The effect noted in the paper includes dividends, which are functionally buybacks, and tend to be paid at higher rates when market valuations are low.

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