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

Here is this week’s sentiment summary:

Sentiment Surveys
After several weeks of flirting with the half-way mark and just peeking above it for a single week, the retail investors surveyed by the AAII finally went all in. This week’s bullish camp jumped sharply to 57.6%. That is the highest since mid-January 2007.

But while that is garnering all of the attention for most people, I prefer to look at the relative number of bulls compared to bears. And since those who are pessimistic about the stock market’s performance remained relatively stable at 28.5% the bull ratio is actually lower than it was two weeks ago.

So rather than showing the bull ratio, which I normally do, I thought we’d take a look at the 4 week moving average (if you’d like to see the bull ratio you can always click on the previous link).
AAII bull ratio 4wk MA Nov 2010

As you can see from the chart, usually optimism is muted within a bear market. So the highs within the 2008 bear market are not as lofty as the ones preceding it. The biggest bout of optimism was in May 2008, the last gasp of the bulls before the unrelenting waterfall declines that proved so devastating.

There is no question though that retail investors are in an extremely bullish mood and they have been sustaining this level of enthusiasm for several weeks.

Investors Intelligence
Stock market newsletter editors have also become increasingly bullish this week with 48.4% identified as such by the weekly Investors Intelligence survey conducted by ChartCraft. That is the highest number since the first week of May 2010 when it spiked to 56%. The bears declined to just 23.1% this week. As with the AAII survey, while the bulls have increased to an extreme level, the bears have not retreated with the same intensity. So the bull/bear ratio for this survey stands almost unchanged at 2.1:1.0.

investors intelligence bull bear ratio Nov 2010

For the past 7 years, a ratio approaching 3:1 has been the ceiling for this ratio. It is possible that this may ‘reset’ or that we may be looking at a top which causes a shallow retracement. The only top that coincides with this bull/bear ratio level is the June 2009 one which pushed the S&P 500 index down 8% approximately.

Hulbert Newsletter Sentiment
In case you missed it, we discussed this alternative measure of newsletter sentiment a few days ago: Newsletter Bullish Sentiment Jumps To Extremes. For the details, check out the link.

Economic Confidence Index
Gallup’s Economic Confidence Index increased recently to -19. This is the highest level for six months:

gallup economic confidence index Nov 2010
Source: Gallup

The ECI is based on two separate surveys: the Economic Outlook (which asks Americans if economic conditions are getting better or worse) and Economic Conditions (which asks Americans to rate today’s economic conditions as ‘poor’, ‘only fair’, ‘good’ or ‘excellent’.

It may be a bit difficult to make out in the chart above but the dark green line reached a peak on April 21-23rd rising to -17 and again shortly thereafter in early May 2010 (-17 again). Looking further back first days of January 2010 again reached -17. Since then the most recent figures show a slight decrease in optimism reducing the ECI to -26.

I may be reaching a bit but both of those dates correspond to optimistic moods in the stock market and turned out to be tops.

NAAIM Survey of Manager Sentiment
After several weeks of reluctance, it appears that the active managers have finally decided to jump in with both feet. The average exposure in the NAAIM survey increased slightly to 71.5% from last week but the median exposure spiked to 97% long - a level that we had not seen since early May 2007.

NAAIM survey of manager sentiment Nov 2010 extreme

This sentiment survey has a short lifespan since it started in 2006 but it has only spent 4.8% of the time above this level so this is a rather rare and extreme occurrence.

Rydex Cash Flow Ratio
This indicator is slightly different than the more familiar Rydex ratio which is a simple comparison of the assets of bull/bear funds. The Rydex Cash Flow ratio attempts to measure the ratio of cash flowing in and out of Rydex equity funds by adjusting the total assets in each fund according to the NAV gains/losses to isolate how much money was added or withdrawn. The numerator is the cumulative flow of total of money market funds as well as short oriented equity funds and the denominator is the cumulative flows of long equity funds.

rydex cash flow ratio Nov 2010
Source: Decision Point

This ratio has recovered from the lows in the summer that also correspond to the lows in the S&P 500 index. But it is still at a relatively low level, especially when we compare it to the performance of the equity market itself. The participation of Rydex traders in the market can be likened more to the June and August 2010 rallies than the April one where inflows pushed the Rydex Cash Flow Ratio up to the highest level since 2005. So with equities trading considerably higher, Rydex traders are not jumping to increase their exposure. Surprisingly, they are slightly more reserved than there were in August 2010.

Hedge Fund Flows
According to the TrimTabs/Barclay Hedge survey, hedge funds had inflows of $3.8 billion for the month of September 2010. That is the third consecutive month of net inflows totalling $16.1 billion. The performance numbers were also good with 9 out of 10 hedge funds reporting that positive returns for the month of September. But a little more than half the managers are still below their high-watermark.

The gusher of inflows is explained by a survey conducted by Spectrem Group. Approximately 50% of the affluent investors (+$25 million) surveyed had investments in hedge funds, up from 35% in 2007 - before the bear market. Wealthy Americans have also upped their holdings of private equity (56%, up from 39% in 2007) and venture capital (52%, up from 37% in 2007). This renewed appetite for risk is a bit baffling since hedge funds were unable to provide a proper hedge from the bear market.

Mutual Fund Flows
According to ICI $1.1 billion was withdrawn from domestic US equity funds in the first week of November. Foreign equity funds in contrast received $1.86 billion of inflows and bond funds, $3.5 billion. According to Lipper the junk bond party continued for the 10th straight week with yet another net inflow last week: $856.9 million (from November 3rd to November 10th).

TrimTabs Demand Index which started in September 2008 and is based on 21 individual sentiment and money flow components fell to 73.9 - the first time it has been below 75 since February 2010. Previous to that, it was trading above 75 in December 2009 and in the 90’s during the summer of 2009 as the S&P 500 lifted off the bear market lows. Usually high levels correspond to market tops.

Corporate Insiders
Insider selling is at a 3 year high according to TrimTabs. For the past 60 days, TrimTabs calculates approximately $16 billion worth of shares sold by corporate insiders. To find a higher figure we have to go back to October 2007 when insider selling reached $20 billion. As well, the re-opening of the IPO market has whetted the appetite of existing public companies who are coming out with secondary share offerings. So basically, corporate insiders are not only selling their own shares to the public, they are taking advantage of these higher prices and the improved mood on Wall Street to sell more shares on behalf of the companies they control.

Option Sentiment
For some time now we’ve been observing the strange phenomena of both the retail option traders and the institutional option traders being on the long side of the market. The CBOE put call ratio (equity only) 10 day moving average is 0.55 implying that approximately twice as many calls are being purchased as puts. The ISE Sentiment index (a call put ratio) which tracks option trades by the retail crowd confirms this with a 10 day moving average of 207.30. Converted to put/call format it is 0.48 close to the CBOE ratio but slightly more bullish.

As you can see from this chart comparing the two put call ratios, usually they trace out a mirror opposite movement:

Click to see larger version in a new tab:
OEX and equity only put call ratio Nov 2010

The OEX put call ratio had been showing a remarkable amount of call buying as well. That is until this week. The average OEX put call ratio for this week was 0.93 - almost parity. This is a almost double what it was just a few days ago on November 2nd (0.54).

It is too early to definitively say that this is the inflection point for the OEX put call ratio. Especially since the OEX put call ratio remains at very low levels. But there has clearly been a change in tone, especially when we compare it to the CBOE equity only put call ratio and the ISEE.

US Dollar
The US dollar has been quietly rallying since last Friday. It is still at very depressed levels and about to bump its head on the falling 50 day moving average. Any optimistic sentiment towards the dollar remains scarce. According to the latest Speculative Sentiment Index which tracks the retail forex positions of retail accounts as reported by the forex broker, DailyFX, shows a lack of belief in the short term rally. As an example, in response, the US dollar short positions against the British pound have doubled. So with that kind of skepticism, the dollar rally just may stick and give us contrarians the bottom that we’ve been calling for an embarrassingly long time.

Gold Sentiment
Here’s an updated chart of the Rydex Precious Metals fund assets compared to the price of gold:

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9 Responses to “Sentiment Overview: Week Of November 12th, 2010”  

  1. 1 Mike C

    Gold Sentiment
    Here’s an updated chart of the Rydex Precious Metals fund assets compared to the price of gold:

    I don’t see the chart. Would it be possible to include the DSI number each week for both gold and the S&P 500?

  2. 2 Farhan

    Hi Babak,

    It seems like optimism really spiked during the last week. It is quite interesting, that it happened in the same way as in 2007 i.e. a slightly higher high and every one starts to join the bullish bandwagon. In any case, I have written about an interesting observation on the QE2 and recent market behavior @ I hope that you will be able to give me some feedback on this post.

  3. 3 Babak

    Mike, I’m having some technical difficulties at the moment. Here is the chart, until I have a chance to put it in its proper place:

    Rydex precious metals assets NAV Nov 2010 update

  4. 4 Guy M. Lerner


    Here is some work I did on the OEX Put Call ratio

    Essentially, this is not a useful indicator no matter how you slice and dice it. Why use something if it doesn’t work consistently or across all types of markets?

  5. 5 Wes


    I view the 4 week average not as a measure of bullishness, but as a measure of complacency.

    By the way, you’ll have to go back to 2005 to find a four week average of the AAII bears as low as it is now.

    @Guy M Lerner

    I read your work and I find two differences with the way I use OEX data. First of all, I never use this data as a short term timing tool. I use it to indicate bull or bear phases of the market. This is particularly important during a market correction.

    Second, these guys can throw curveballs intraday. I think you need to combine the daily buys/sells with the open interest in order to get the big picture. What they are taking home is quite important.

    I’ve found no problem interpreting the OEX data.

  6. 6 PEJ

    Hi Babak,
    My contribution to your sentiment overview for this week:
    CEOs Most Optimistic on U.S. Profits

  7. 7 PEJ

    Quick Question Babak: would you know where EWI gets their “mutual funds non-invested cash” figures from?

  8. 8 Babak

    Pej, I’m not sure but if you email them, I’m sure they’d get back to you on that.

    btw re the CEO optimism, yes, that is troubling and it has been mentioned by NDR. I referred to something similar in August: Analyst Confidence. Analysts obviously take their cues from company executives and they’re really perking up.

  9. 9 PEJ

    Thanks Babak. I’ll try to drop them a line over the week-end to find out where they source this data :-)

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