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Sentiment Overview: Week Of November 21st, 2008 at Trader’s Narrative

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Sentiment Surveys
For the past few sentiment overviews, I’ve been bemoaning the lack of bearishness from retail investors. According to the AAII weekly survey, we did see a huge spike up to 60% bearishness, but then a very quick nonchallant attitude took over Mom and Pop investors across the land. For some strange reason, as the bear continued to maul markets with blood curdling ferocity, they didn’t care. Or maybe they were numb from shock already.

It was not surprising then that the market broke through the October and November lows. This week’s AAII numbers show an increase in fear (finally!). It is important to note that they came in on Wednesday - before the elevator drop through previous support levels - so it is curious to guesstimate where sentiment would be if the survey was administered afterwards.

AAII bulls came in at 24.37% and the bears at 57.14%. While this is a good development, as I’ve said for the Nth time, what we really need to see is the market recover and a commensurate increase (or plateau) in bearish sentiment. That would give me confidence in any ensuing rally. But if once again people start clinging to every uptick as a hopeful recovery, it will be short lived.

ChartCraft’s Investor’s Intelligence sentiment measure was mostly unchanged with 31% bulls (a tiny decrease) and 43.6% bears (slight bump up from last week). This survey came out on November 18th and it continues the slow trending decrease in bearishness from October.

citigroup panic euphoria model nov 21 2008Of course, the completely useless Citigroup Panic Euphoria model continued to impersonate a dead parrot’s heartbeat monitor. If Vikram wants to cut costs at Citigroup (C), he could start at worse places.

Market Vane’s bullish consensus sentiment dropped slightly to 40%. During this downturn this measure of sentiment has also stubbornly remained above previous panic levels. The lowest it reached was 32%, a far cry from the 20% range we saw in the darkest hour of the previous bear market.

Options Market
The options market continues to confound. While the CBOE equity only put call ratio increased to 1.16 as a result of Wednesday’s 6.12% plunge in the S&P 500, the next day’s carnage which took the index down 6.7% actually saw the put call ratio fall to 1.05.

The same pattern was noticeable in the ISE Sentiment index. The ISE call put ratio fell to 78 on November 19th - low but not extreme - but then it rebounded the next day even as the market took a more intense drubbing.

The options market continues to act crazy. Although put call ratios don’t walk hand in hand with the market every day, this is just bonkers. It is almost as if we’ve entered an alternative universe where previous market indicators and measures mean nothing.

Volatility hasn’t imploded (yet). In fact, the VIX is back at previous highs last seen in late October. The thin layer of good news may be that while the market has broken to new lows, volatility hasn’t.

It wasn’t long ago when 45 was considered “extreme”. Since mid October the VIX has stayed above “extreme” and redefined it. Beforehand, we had broken above 45 on only four occasions. So yes, this is an absolutely unprecedented market.

Value Investors Peek Out
The ever cautious head of Fairfax Holdings (FFH), Prem Watsa, has peeked from under the covers and decided to remove the protective hedges for the firm’s equity portfolio. While Fairfax still holds the bulk of their assets in fixed income, it is another sign of valuations coming to attractive levels. Watsa is compared by some to Buffett because of his cautious nature and his strict adherence to a value oriented investment philosophy.

Watsa wrote to Fairfax shareholders: “While we believe the recession may be long and deep, we also believe that stock prices may have already discounted the worst of the economic decline. As value investors, we are finding an incredible number of investment opportunities across the world. That said, in the short term we recognize that stock markets can continue to fall significantly.”

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