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Sentiment Overview: Week Of March 7th, 2008 at Trader’s Narrative

Is it just me or is this tape incredibly frustrating? We’re dripping lower, seemingly on our way to test the January lows. But it is anyone’s guess if we we’ll get a head fake lower and then reverse up or just cascade down into a continuous bear market decline, ala the 1970’s.

To help light the way, here is the sentiment overview for the past week:

Hulbert Newsletter Sentiment
According to Mark Hulbert, the keeper of the HSNSI (Hulbert Stock Newsletter Sentiment Index), there is contrarian arguments that the January low will be intact.

This week’s market decline brought down the portfolio allocation of stock newsletters to -16.4%. That means the average market timing newsletter iss advising their clients to be short the market.

The HSNSI is now not only below the January 22nd lows, it is the lowest such sentiment reading since October 2005 when it scraped -30%. The silver lining in the clouds is that newsletters are dejected and starting to throw in the towel. They are not stubborn in their denial of a declining market. That, according to contrarian analysis, sets the stage for a potential rally.

Option Market
As I pointed out yesterday, the CBOE’s equity only put call ratio spiked to a four year high. Today it retreated to 0.90 - still quite high but backing away from everest proportions.

On Friday it was the ISEE Sentiment Index’s day to turn heads. I suppose the retail traders read the headlines and watched the TV reports from Thursday’s trading, got freaked out of their minds and started buying puts hand over fist, pulling the ISE sentiment index fdown to 65 - the lowest it has been since January 17th of this year.

On that day the ISE index was 60, meaning that retail traders were only buying 60 calls for each 100 puts. Strangely enough, the market bottomed a few days later (January 22nd or 23rd, depending on whether you go by the intra-day low or the close) when the ISE ratio was much higher: 105 and 98!

This is exactly what happened during the March 2007 retest of the bottom. During the first decline, the ISE sentiment dipped to the 60’s but during the subsequent retest, it was at par (100).

AAII Sentiment Survey
Finally, among the sentiment surveys this week, the AAII results stand out with a meager 22% bullish and 50% bearish (again). During the January decline, the AAII survey showed similarly low bullishness but the rally it ignited was mild to say the least. You remember this chart, right?

S&P 500 SPX and AAII sentiment 1988-2007

We’ll have to wait a few more weeks to see if it will be borne out but it is an understatement that so far, it has been a disappointment. By the end of this month, we’ll have given it the 13 weeks it requires. Let’s see if the AAII contrarian sentiment analysis lives up to its history - mark your calendars!

Investor’s Intelligence
In agreement with the retail investors, this week’s Investor’s Intelligence sentiment survey shows the newsletters at 42% bullish and 37% bearish. Both those levels correspond to extremes, which can be interpreted according to contrarian thinking as very bullish for the market.

To wrap up, while we may have to endure some further turbulence due to our proximity to the January lows, the sentiment is horrible out there and it will set the stage for an intermediate to long term rally. The trick will be to not get shaken out of long positions while still maintaining discipline.

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6 Responses to “Sentiment Overview: Week Of March 7th, 2008”  

  1. 1 Bill K

    All of this weeks contrary information presents a compelling case for at least a quick bounce. In addition to that, we are right in the territory that most can and would look back on as a double bottom if we rally higher from here. I don’t think very many people wanted to buy and hold new positions over the weekend, myself included. So it seems like we are set up for at least some kind of a double bottom bounce on Monday, unless we get some real bad news. The real litmus test of this rally will be how much conviction the market shows during that rally. The NASDAQ is already at new lows, but I still believe that we will break through to new lows on the S&P 500 and the Dow, but it might not happen next week. I think we will need to see even more extreme panic indicated to put a long term bottom in.

  2. 2 wes

    These sentiment surveys are just that : opinions.

    I continue to look at the Rydex ratio, the ratio of the actual money invested by retail investors (regardless of what their “opinion” is) in bullish Rydex funds minus the actual money invested in bearish funds to the sum of the money invested in these funds. In other words, (bullish - bearish)/(bullish bearish).

    Now this is what retail investors are actually DOING (with their own money), rather than saying, and I think it is a much more important sentiment indicator for that reason.

    The Rydex ratio remains above (more bullish than) its level at the August lows, and well above its level at last March’s lows.

    The ratio now is about 7% as compared with 2% at August lows and -2% (more bears than bulls) at last March lows.

    It may well be that the Rydex ratio will once again have to reflect more bears than bulls before this decline is over.

  3. 3 wes

    The denominator above should be (bullish PLUS bearish). For some reason the plus sign did not print.

  4. 4 Bourne

    Babak, you have one of the most important posts about sentiment in your favourites folder: the one about sentiment in bear markets.
    My guess has to do with it: in a bear market we should expect just the strong accumulation of pesimism we are witnessing before any rally. (In fact, this is the single fact that has convinced me the most about he bearish condition of this market).
    Also: this bubble is a “strong hands” bubble. Nothing to do with dotcom retail investors’ manias. This time, the guys that went nuts were the financial ones. So, I suspect the retail investors sentiment is even weaker a indicator for bullish rebounds.
    Thirdly: I’m watching aprox 11.500 dow for a serious attempt of a short term bottom. If this happens and my interpretation of sentiment is right, beware of any optimistic figure in put-call ratios etc afterwards. From a bearish market perspective, the bearish rebound should be fast and deep.

  5. 5 Scoad

    As a little sentiment aside, Jim Cramer tells us Fri to” sell tech on strenght”. Maybe if he’s as right as he was in Dec. when he told us how right tech was right then we should consider buying a little. But then anecdotal sentimentalism isnt working any better than scientific sentimentalism, or anything else for that matter, so maybe we should just total up another cold one and watch the fires burn a little longer.
    Thanks very much for SOXX, Gold & oil Babak.
    Gold won’t be done till the little specs run-and not even so much as a sqiggle yet.
    Third world still wants what !st world got but can their fire and thirst trump the !st worlds jaded hubris- very few seem to think so- thats good-MAYBE.

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