Trader’s Narrative

Here’s this week’s sentiment wrap-up:

Investors Intelligence
According to ChartCraft, the keeper of the Investors Intelligence weekly stock newsletter sentiment survey, we had a small increase in bulls to 28.4%. And about the same magnitude decrease in pessimism to bring the bears to 44.3% of respondents.

This week’s low level of bullishness provides some hope but compared to late last year (October 2008) we have a much lower bearish sentiment. That’s certainly to be expected, considering that the market has rallied from its recent low, but as I’ve repeatedly mentioned, the ideal situation is to see disbelief accompany such a rally. Instead, for the most part, we are seeing a normal reemergence of the status quo.

AAII
The retail investors, as measured by the weekly AAII survey showed less optimism with 39% bullish (a fall of 6% points). There was a 4 percentage points increase in pessimists to 42% bearish. This is certainly interesting and something that I’ve been watching for. That is, a decrease in bullishness after a rise in the stock market. The only problem is that considering everything else, I have trouble giving too much weight to this one particular data point.

Option Ratios
The options market continues to mystify me. Today, although the S&P 500 index (SPX) dropped 2% the CBOE (equity only) put call ratio barely moved. And the ISE Sentiment index (equities only) went up from 136 to 144.

Volatility
The CBOE volatility index strangely continues to defy gravity, staying within a 40ish range. Take a look at the very long term chart and it seems that previous resistance has become support at this level:

Rydex Ratio
The extreme sentiment that we saw at the beginning of March translated itself to a very spooked Rydex ratio:

And although we have since recovered sharply, Rydex traders are suddenly eschewing the short side in a big way. Money has flowed out of the inverse funds in such a hurry that their asset levels are at multi-year extremes. This just goes to show, once again, that the average market participant has quickly renewed their appetite for risk and jumped on the rally bandwagon.

If you were smart (or lucky) enough to ride this rocket of a rally, it is time to pare back positions and prepare for a possible less-than-dignified landing.

Magazine Cover
Here’s an interesting dichotomy. Time magazine’s cover this week for the US market is pretty tame: The End of Excess with the image of a reset button.

But take a look at the international edition: All Together Now. And the accompanying image being a boat going over a massive waterfall!

Not sure what that portends. I’ve never seen different covers like this. Any ideas?