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Sentiment Overview: Week Of June 13th, 2008 at Trader’s Narrative





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AAII
The retail investors as measured by the American Association of Individual Investor’s weekly sentiment survey are astonishingly pessimistic: 54% bearish.

To find a more gloomy view from the retail investor’s camp we’d have to go back to mid January when the AAII sentiment reached 59% bearish.

Back then I showed you this chart:

S&P 500 SPX and AAII sentiment 1988-2007

We have definitely seen 13 weeks pass since then and within a few more weeks will also complete 26 weeks. But unlike the historic average shown in the bar chart above, the market has yet to hold a decisive rally.

The S&P 500 Index (SPX) did momentarily reach a high of 1440 but couldn’t hold on to it. For most of the time we’ve been trading below the levels at which we first saw a +50% bearish AAII sentiment. As I’ve outlined before, sentiment during a bear market is a different beast.

Hulbert Newsletter Sentiment
Mark Hulbert is worried that while we may have put in a significant bottom with the March low, it may not hold. According to the Hulbert Stock Newsletter Sentiment Index (HSNSI) the average exposure recommended is a paltry 2.2%. And while this is low, back in early March the average newsletter editor was downright panicking with a -29.2% exposure - meaning actually being short the market with almost a third of total portfolio allocation.

As we head into a possible retest, it isn’t reassuring to see sentiment sitting so much above those levels. The ideal sentiment that would catapult us higher would be an even more intense panic with the kind of market weakness we’ve seen. While that may change anytime, the HSNSI doesn’t reflect that right now.

Investor’s Intelligence
No significant change in this sentiment measure: bullss dropped from 44.8% to 43% and bears increased slightly from 31.1% to 32.6%. It isn’t offering much of an edge as it sits in lukewarm waters similar to the Hulbert analysis.

CBOE Put Call Ratio
While the traditional put call ratio (equity only) did rise during the turmoil of this week, we didn’t see it reach or exceed the important 1.0 milestone. In fact, it only was able to muster a high of 0.84 on Wednesday. That reflects a good amount of fear but just not enough to carve out an important inflection point.

isee sentiment data june 13 2008ISEE Sentiment
This past Wednesday and Thursday the ISEE Sentiment measure fell to 74 and 75 - the lowest since mid March low this measure reached 56 (March 10th 2008).

Remember, the ISEE sentiment numbers are calculated differently from the CBOE put call ratio. For one, the ratio is inverted with calls as the numerator and puts as the denominator. Further, the ISE only uses options which are traded by non-market makers, stripping out the noise and showing what retail and institutional traders are doing. And lastly, the ISE data is for opening orders only.

All in all, a much more robust and useful measure of options trading sentiment.

Rydex Traders
According to Jason Goepfert:

Rydex traders had finally started focusing on “safe” funds more than “risky” funds - a stark change from earlier in May when they were five times more likely to trade a risky fund than a safe one. As of yesterday, the ratio fell under 0.5, meaning that those folks were more than twice as likely to trade a safe fund than a risky one.

Conclusion
Since I eschew using a single indicator to light the way, the weight of the indicators are confusing with many cross currents pulling me in different directions. The troubling and somewhat muddy sentiment outlook doesn’t help. Hopefully things will resolve themselves soon and the picture will become clearer.

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7 Responses to “Sentiment Overview: Week Of June 13th, 2008”  

  1. 1 Paul D. Castro, CFA

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    Babak wrote: “Investor’s Intelligence
    No significant change in this sentiment measure: bears dropped from 44.8% to 43% and bulls increased slightly from 31.1% to 32.6%. It isn’t offering much of an edge as it sits in lukewarm waters similar to the Hulbert analysis.”

    However, Schaeffer’s site shows 43% bullish, not bearish.

    So, does Schaeffer have it backwards on his site?

    http://www.schaeffersresearch.com/streetools/market_tools/inv_intel.aspx

  2. 2 Babak

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    Paul, thanks for catching that, it was an error on my part, I had bears written instead of bulls. I’ve corrected it now :-)

  3. 3 Risk Averse Alert

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    You say…

    “The weight of the indicators are confusing with many cross currents

    “The … somewhat muddy sentiment outlook doesn’t help.

    “Hopefully things will resolve themselves soon and the picture will become clearer.”

    If I am correct about the present period’s similarity to options expiration week, October 1987, then by Tuesday, June 24, 2008, the picture will become crystal clear.

    Realize the crash of ‘87 was in the grand scheme of things a shakedown — a transfer of shares from weak hand to strong. Simply consider what followed the crash.

    Then, the market never looked back. This time, though, I don’t suppose we’ll be so lucky…

  4. 4 Bill K

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    Babak, I hope all is well. Any chance of getting a weekly sentiment update? I really look forward to your weekly summaries, even if you don’t have an opinion on what direction we are headed right now. I personally think we have some more downside ahead. Bill

  5. 5 JB

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    Babak Agha
    Are you coming back on line any time soon?

  6. 6 Bill K

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    This website was shown on CNBC yesterday. When they were talking about Jim Cramer’s rant heard around the world they were talking about it being shown all over TV and the internet. While they were talking about it being all over the internet they showed this website showing the youtube type version of the rant.

    Now all we need is a host of this famous site.

    Bill

  7. 7 Babak

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    wow Bill, I had no idea and totally missed it - not that I usually watch CNBC ;)
    so does this count as my 15 seconds of fame? lol

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