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Sentiment Overview: Week of March 14th, 2008 at Trader’s Narrative





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I have a nagging feeling this week will be one to remember. Whether it will be the bulls or the bears that will look on it fondly, only time knows. Here is this week’s unforgettable sentiment recap:

Sentiment Surveys
According to the Investor’s Intelligence survey of newsletter editors, we already had a dearth of bullishness, but now we have historically low numbers: 31.1% to be precise. Since stock newsletter editors are usually an upbeat lot, this is actually the lowest since October 2002 and early 1995.

Not to be outdone, the AAII survey of retail investors is showing that this week, 59% of respondents are bearish. We’ve been here before; at the beginning of the year. Lets see if this time we can light a flame under this rocket.

CBOE Put Call Ratio
Although the VIX rose moderately, thanks to the panic caused by the Bear Stearns (BSC) debacle, the CBOE (equity only) put call ratio zoomed above 1.16 - and I thought last week’s four year high was special!

Hulbert Stock Newsletter Sentiment Index
Mark Hulbert tracks newsletters in general but he also has a sentiment measure based on a sub-set of stock newsletters which time the market. This HSNSI is usually a fantastic contrarian indicator since editors tend to en masse, lose all hope when the market is carving out a bottom. And they tend to be euphoric when the market is about to have the rug pulled from under it.

Although this sentiment measure has been negative for some time, it is now showing real fear. This week it reached -22.5% which means that the average timer is recommending their clients short this market with more than a fifth of their money.

The really bullish significance of this is that in contrast to now, the last time the market was at these levels in mid January, the market timing newsletters were quite nonchalantly looking over the precipice. The fact that they have now soiled their pants (sentiment wise) provides us with a higher probability that the double bottom will hold.

To find a lower sentiment reading from the Hulbert newsletter sentiment index, we’d have to go back all the way to 2005. More specifically, to early May and mid October, 2005 when the market made two important lows:

HSNSI 2005 sentiment chart

“Dumb” vs. “Smart” Money
These are two proprietary indicators from Jason Goepfert that amalgamate several sentiment and technical indicators. The “Dumb Money” indicator fell on Friday to 12.5% which means that to find it a friend, we would have to travel all the way back to early 1995 and August 1998. You remember the summer of 1998, right? when we were suffering through the Asian currency and LTCM crisis? …good times, good times.

According to Jason, the gap between the two indicators is also as wide as it has been since 1995 and 1998. Pull up some long term charts and you’ll see the significance of that.

Consumer Sentiment
Although it would usually make big headlines, the results of the Reuters/University of Michigan Surveys of Consumers got buried amid the panic over Bear Stearns today. Consumer sentiment continued to decline to 70.5 - that’s the lowest reading in 16 years!

Like most sentiment measures, this one should also be taken with a spoonful of contrarianism: up is down, down is up. Which means that when consumers are most pessimistic, we have the best opportunity to go long. And when consumers are on average jumping for joy, we have to batten down the hatches.

News Headlines & Covers
Getting your umbrella out will do you no good. We have a torrential downpour of negative news and depressing headlines. To see what I mean, open any news website or newspaper. It is all doom and gloom. This or that hedge fund going belly-up, Bear Stearns pushing up the daisies, the mortgage market collapsing, the credit market in a spasms, consumer sentiment tunneling into the substrata, etc.

Even after the remarkable 90-90 up day we had on Tuesday, the majority are denying that it could potentially have any real bullish portent - although historical precedent says otherwise.

Here are a few recent covers from Business Week:

business week covers Feb March 2008

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16 Responses to “Sentiment Overview: Week of March 14th, 2008”  

  1. 1 MrEd

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    How does sentiment data work in an environment of forced selling? People feel bad because they have to sell assets? When people are going bankrupt and have to sell their houses and that continues to lead to lower prices in homes, is sentiment negative? Does that portend a turnaround? Exact same goes for stocks. This is one reason market technicians get a bad reputation. They use data points that have no validity with regards to underlying fundamentals. But, I do enjoy your blog as there is alot of value in your work.

  2. 2 stan

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    Re: Hulbert and worst since 2005. Give me a break. Does anyone have any perception of history beyond what happened yesterday? You are not even looking at a complete market cycle, not to mention generational data.

  3. 3 dae

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    Sounds like you clowns are still short. You’re likely to be upset with more than just this blog or Hulber by the end of next week.

  4. 4 Mike

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    I subscribe to sentimentrader.com - Jason provides everything you want to know about sentiment, which is excessively bearish right now. Still, (while modestly long) even Jason acknowledges that if we drop much lower, we’ll be in danger of moving into relatively uncharted territory and he will at that point, sell. The danger will then become (according to me) that we’ll get some of the ‘long term’ bigger money selling and that could lead to a very big decline (another 25%?). Not predicting because it all comes down to the credit /financial/debt system and how much stuff needs to still be wrung out of that - all of that news totally trumps sentiment IMO.

  5. 5 de

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    “Clowns” comment was a little over the top…my apologies to all. If BSC deal gets done tonight, I think the bears are in trouble…if only in the short term.

  6. 6 MrEd

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    I take no offense to being a clown. At least I’m taking your money and will likely take more of it because if you have been long, you’ve been losing money. I don’t mind wearing big goofy shoes and putting a red cherry on my nose. COT data shows only the retards are going long here. So, I’m a clown and you must be one of the retards. LOL. The concept of bearish and bullish is for the clueless who rely on how they feel to make money. I could care less what the market does. Up or down is fine by me as long as we get ALOT of volatility.

  7. 7 Bill K

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    This BSC buy out for $2 a share could be the catalyst we need to get some real panic and blood in the streets this week. Everyone has to wonder who is next to fail. As soon as we get below 1,270 on the S&P 500 most professionals will feel like the double bottom has failed and the bottom may fall out really fast. I don’t think there will be many brave enough to buy just under 1,270. I think the real buying opportunity will come in the 1,210-1,230 range, if we can get there in the next day or two of panic selling. If we can get to that range by Tuesday the VIX should be at or near 40 with equity only put/call ratios over 1.2. That is the kind of panic that would give me great confidence to buy. As I have mentioned here in the past couple of weeks I am a die hard contrarian and just feel we need higher readings then normal this time to get a longer term bottom in. 1,200 has strong support from 2005 on th chart, but I don’t want to wait until it gets all the way to 1,200 to buy, as we might not get there. It should be an interesting week!

  8. 8 de

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    This will definitely make for an interesting week. Be you a bull or a bear, I wouldn’t presume anything at this point. And we can agree on one thing…volatility is grand!

  9. 9 Kristy

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    The Investor’s Intelligence survey is my favorite indicator to watch. Last week when it hit 31.1% bullish vs 43.6 bearish, I knew I needed to update my watch list and get ready for the market to bottom. Finally, people are giving up!

  10. 10 de

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    MrEd, your squeeze-o-gram is coming in the mail today. Too many on your side of the boat. Retards over clowns, I guess.

  1. 1 GrowYourFunds
  2. 2 Afraid to Trade.com Blog - Overcoming Fears » Next Week Could be Very Interesting
  3. 3 Reasons Why This Is An Intermediate Bottom
  4. 4 Sentiment Overview: Week of March 21st, 2008
  5. 5 Recent Sentiment « Phil’s Favorites
  6. 6 Consumer Sentiment Always Darkest Before Dawn


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