Trader’s Narrative

Here’s this week’s short but sweet sentiment overview:

Sentiment Surveys
The retail investor’s sentiment as measured by the weekly AAII survey saw the bulls at 38% (a drop of 7% points) and the bears at 43%, with a 10% point increase. While this is a small increase in bearishness, when you consider that we are still very close to an important support level, it is disappointing to see so many optimists.

The Investor’s Intelligence sentiment, which measures newsletter editor’s sentiment, was hardly changed with 31.9% bulls and 46.1% bears. While contrarians may not like the fact that there has been a mad dash away from extreme pessimism in these sentiment gauges, there is another more lenient interpretation. According to Gray and Burke, the duo that reads and categorizes each newsletter editor as bullish, bearish or neutral for ChartCraft, the fact that we saw such a move may be normal. Previous market lows have seen such a shift as bulls increase over time as the market recovers.

ISE Sentiment
On Wednesday, when we stood at the precipice, looking down and the abyss looked back at us, the ISE sentiment data shows that we finally got some semblance of fear from retail options traders. On November 12th, 2008 the ISEE sentiment index (all data) reached 67 - which is on point above where the ISE ratio was on September 19th, 2008 when the S&P 500 Index was at 1255.

This historically useful contrarian indicator may be returning to its usual pattern. But frankly, I’m growing impatient as along with the rest of the options market, it has been acting crazy during this latest market decline. Since I prefer using the equity only data for the CBOE options data, I looked at the same for the ISE options data and came away with an interesting observation. For some reason, during the past six months, the data is within a much narrower range than before:

I’m not sure what to make of this but there it is. I’m sure brighter minds out there will see the significance and perhaps decide to share their insight.

But just so there is no confusion, the low I mentioned before (67) on Wednesday was for all data (equity, ETF and indices options), not just the equity data.