Here is the sentiment overview for this strange week:
The results of the AAII sentiment survey are reported every week, Thursday mornings based on retail investors responses to the survey the day before. Keeping this in mind, the recent AAII sentiment is understandable as it was measured before Thursday’s turbulent markets. It shows no significant change from last week with 39.1% bullish and 28.57% bearish. I’ll be watching for next week’s results carefully to see just how much the market has rattled the cages of the US retail investor.
The AAII asset allocation survey shows a very slight uptick in equities (appx. 60%) and a slight decrease in cash. Since early 2007, US retail investors are holding the same amount of cash but they have shifted about 10% of their portfolio away from equities and towards bonds. According to the latest ICI data, US mutual fund flows show a continued preference to fixed income. The month of April had inflows of $26 billion into bond funds while only $5 billion was directed to equity funds.
The sentiment measure of newsletter editors sentiment continues to show an overabundance of optimism. This week 56% were bullish and 18.7% bearish - relatively unchanged from last week. That leaves us with a 3:1 bull ratio for the third week in a row. As I’ve mentioned several times, this proportion has corresponded to market tops. Again, it will be interesting to see the numbers next week when they include this week’s tumultuous final two days of trading.
Hulbert Newsletter Sentiment
Unlike the AAII and the II survey, the Hulbert Stock Newsletter Sentiment Index (HSNSI) is measured daily so it has already reacted to Thursday’s drop. According to Mark Hulbert, short term oriented newsletters that try to time the market have drastically reduced their exposure to stocks. The HSNSI, which measures the general stock market, dropped by 25% points. That is one of the largest single day drops ever.
The HNNSI which measures the sentiment for short term oriented newsletters that try to time the Nasdaq market specifically dropped even further, registering a one day decline of 38% points. Again, this is one of the largest single day drops in the history of this sentiment measure. It also comes just a week after it rose to a high of 80% not seen since the bubble days of 2000.
The fact that newsletters capitulated is a good contrarian sign that the decline will be contained. Had they instead insisted in their extremely bullish positions, then we would expect to see much lower prices in the coming weeks. I’ll watch to see if the AAII and the II match this reaction. If so, we have an even stronger confirmation from a contrarian point of view.
According to InsiderScore selling continues to dominate buying by a wide margin. We’ve seen a continuously extreme reading from insider activity measures for the past 12 months. The market has - until recently - ignored this vote of no confidence and plowed ahead. This sustained level of selling pressure by insiders is unprecedented in recent history. Usually we see the buy/sell ratio fluctuate between the two extremes.
It was surprising to see the amount of nonchalance in the option markets during this mini-panic. While equity traders were having aneurysms left and right, option traders for the most part were yawning. Today the CBOE (equity only) put call ratio spiked to 0.80, but it is still not at parity, the level which we normally associate with real fear. The 10 day average came to just 0.603. While this is definitely higher than the extreme low we saw at the beginning of last month, it is still not high enough to correspond to previous levels where the market has found its footing:
The ISE Sentiment index corroborates the CBOE option sentiment. On Thursday, as I already commented, it dropped to 136. Today it actually rose slightly to 139. But the strange thing is that on Wednesday, before any fireworks went off, the ISE call put ratio was at 139. So we didn’t really see any reaction from the retail option traders. At least not yet.
The 10 day moving average of the equity only ISE call put ratio is 176. Similar to the CBOE option sentiment, this is significantly lower than the crazy bullishness we saw in mid April. But it is not yet at a level which we could say demonstrates real concern about the future. The
most recent time the 10 day average of the ISE Sentiment was at this level was early March 2010.
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