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Sentiment Overview: Week Of March 12th, 2010 at Trader’s Narrative

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Here is this week’s look at stock market sentiment data from various sources:

Sentiment Surveys:
According to the AAII weekly survey of retail investor sentiment this week we had 45.29% bulls and 25.29% bears. The last time we saw a similar posture was in mid January 2010 (see that week’s sentiment overview for details). Although, the AAII was even more lopsided, with more than 2.14 bulls for every bear, at the start of the year.

Investors Intelligence, the weekly sentiment index of newsletter editors, showed a similar uptick in optimism with 44.9% bulls and 23.6% bears. While this is an improvement from the mid-February lows, it is still far from the previous top in sentiment in late 2009 which had more than 3 bulls for every 1 bear.

Option Sentiment
Earlier in the week we looked at the retail option traders‘ propensity to throw caution to the wind and reach for further gains. The historical pattern has been negative in the short term, not surprisingly.

With the week’s data in let’s take another look at the ISE Sentiment index:

ISE sentiment 10 day moving average Mar 2010 update

What jumped at me immediately was how the 10 day moving average (orange line) went almost straight up this week. We had 4 days back to back where retail option traders bought more than twice as many call options as put options. So there was clearly a sudden and severe change in the way option traders positioned themselves this week compared to last week.

This was a +20% increase in the 10 day moving average for the week. Shifts of this magnitude are very rare. Since 2006, we’ve only seen 5 instances (excluding duplicate dates):

ISE weekly shift in sentiment 20 percent study Mar 2010

The results are mixed. In 2007 the market took a tumble right on cue. In the spring of 2008 there was a 3 day pull back but it was just a pause before the S&P 500 moved higher. The final instance in 2008 was a great sell signal as the market topped going into the new year. And finally, the March 2009 instance was obviously right smack in the middle of an intense momentum thrust that turned out to be the launch of the cyclical bull market.

The CBOE put call ratio has followed a similar path, veering sharply lower (again). Right now the 10 day moving average of the equity only put call ratio is back to the level it was in mid January 2010 and mid October 2009:

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

Corporate Insiders
According to InsiderScore, corporate insiders are selling once again at a torrid pace. Their buy sell ratio for the S&P is back to levels we saw in the spring of 2007.

Hedge Fund Flows
While retail investors are fleeing equity mutual funds for fixed income funds, hedge funds are continuing to enjoy inflows from accredited and institutional investors for the 11th consecutive month. According to both TrimTabs and BarclayHedge which track fund flows for hedge funds, January 2010 was an uncharacteristically strong month with $7.1 billion in inflows - usually hedge funds see redemptions at the start of the calendar year.

Mutual Fund Cash Levels
Although US equity mutual fund managers have not been given a lot of new funds to put to work, they are drawing down their cash levels to historic lows as they desperately try to keep pace with the rally.

At 3.6%, with an aggregate of $172 billion, the equity cash ratio is back to where it was just as the market peaked in 2007:
mutual fund cash levels ICI long term chart Mar 2010

Meanwhile, bond fund managers must be feeling like Scrooge McDuck, diving into a deep pool of coins with close to 7% cash ratio:

corporate bond fund cash levels ICI long term chart Mar 2010

They either are being given new funds at a pace that outstrips their ability to invest it, or they are recognizing the market cycle and trying to time their buying because they believe bonds will decline in value.

Bloomberg Professional Global Confidence
According to the survey of institutional traders and investors from Bloomberg, global confidence in the stock market dropped in March with concerns about the fallout of Greeceā€™s budget crisis. The Bloomberg Professional Global Confidence Index fell from 54.9 to 53.8. A number above 50% indicates a bullish level - where it has been for the past 8 consecutive months.

But confidence in the US stock market specifically increased to 47.8 in March - up from 35.6 in February 2010. Similarly, global investors confidence in the US dollar continued to increase, rising to 66.4 from 55.7 in February. The survey was conducted between March 1st and 5th and covered 1,612 Bloomberg users.

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4 Responses to “Sentiment Overview: Week Of March 12th, 2010”  

  1. 1 PJ

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    And what does it all mean?

  2. 2 Trading Graphs

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    An excellent read and interesting graphs! I just launched my new trading blog and added your blog’s feed to my reader to keep up with your news. I’ll be checking back quite often.


  3. 3 Babak

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    PJ, for me the sentiment outlook suggests that as the market heads back into the January highs (at least for the S&P 500 index) there is way too much optimism for it to be able to sustain the rally and make significant headway. As you’ve probably noticed, I concentrated on the options market as I think that’s where the edge is right now.

  4. 4 Streetcar

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    Babak, thanks for the info.
    My two cents are as follow -
    There are two scenarios for us: 1) a bear market rally; and 2) a new bull market.
    It is appropriate to compare current call/put ratio to recent ratios (which are in a bearish environment), if we are in a bear market rally.
    However, I’d be reluctant to make such a comparison if we are in a new bull market. I’d rather to compare this with call/put ratios in other early bullish markets.

    My caution originates from all those bear traps since July 2009.

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