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Here is this week’s summary of sentiment data:
The AAII’s bears fell slightly and bears rose by 10% points, so each camp reached exactly 42%. Surprisingly, including this instance, the AAII weekly survey has spent 39 weeks at parity - that’s 3.3% of the time, since the survey was started in 1987. Here is an updated chart of the AAII bull ratio which I first showed when the there was a sudden jump in bearishness in early November (parity in this chart is at 50%):
The Investors Intelligence survey, in contrast, is showing a completely different picture. With 50.6% bullish and a paltry 17.6% bearish, this week’s II pushes the bull bear ratio to almost 3! In other words, there are almost 3 optimistic newsletter editors for each pessimistic one. This after it has spent months almost continuously at 2 should capture the attention of any contrarian. Not to mention that this is the smallest show of bears in 5 years.
The last time we saw more extreme bullishness from ChartCraft’s newsletter sentiment measure was back in late September 2007 when the bulls numbered 55.6%. That was at the height of optimism and the height of the market before the bear market mauled everything in its path.
The Hulbert Stock Newsletter Sentiment Index (HSNSI) fell 6.2% points from last week to 34.4% - that’s the same level it was in mid April, just as the spring rally was about to really get underway. Relatively speaking this is bullish because from the two time periods (last week and April) the market has risen. However, taking a longer term perspective, the HSNSI has fallen to -20% so the current reading is not all that contrarian bullish but rather middle of the road.
The option traders continue to scoff at risk, buying more calls than puts. The ISE sentiment index which measures retail option traders opening orders reached a high of 241 on Tuesday. That means on that day 241 calls were bought for every 100 puts. The 10 day moving average (equity only) for the ISE sentiment index hit 190 by Friday. That’s not as high as it was as recently as late October - when it hit 202 - but it is within the high range and definitely in keeping with tops more than bottoms.
The other more traditional measure of option sentiment, the CBOE (equity only) put call ratio is showing a similar tone. While it hasn’t been as extremely bullish as it was months earlier, its own 10 day moving average is at 0.62 which is in keeping with tops in the equity market, not bottoms.
NYSE Rule 48
This morning the NYSE invoked the rarely used Rule 48:
In the event that extremely high market volatility is likely to have a Floor-wide impact on the ability of DMMs to arrange for the fair and orderly opening, reopening following a market-wide halt of trading at the Exchange, or closing of trading at the Exchange and that absent relief, the operation of the Exchange is likely to be impaired, a qualified Exchange officer may declare an extreme market volatility condition with respect to trading on or through the facilities of the Exchange.
I suspect this was due to the overnight decline in futures as well as the sharp fall in European markets in response to Dubai’s pseudo-default. The S&P 500 fell 2% but nothing really earth shattering occurred. Since this is a qualitative judgment made by a person and not a formula (like the circuit breakers), who is “a qualified officer” who makes the decison? Apparently, it is the CEO of NYSE Euronext or the CEO of NYSE Regulation (or their designee). And since a human makes this decision, that got me curious to see if there was some sort of relationship between the invocation of Rule 48 and market behaviour:
Often, at least in the short term, Rule 48 days see a brief respite but over all it isn’t clear if they have any correlation to returns either in the short term or medium term. But it is interesting nonetheless since the last time the NYSE put Rule 48 in effect was back in April 9th. Before that there were many, many instances, coinciding generally with volatile days - which isn’t all that surprising.
Finally I wanted to add a tiny nugget to the exhaustive sentiment analysis of gold I wrote at the start of the week: the Daily Sentiment Index for gold has now spent more than 17 consecutive days above 90%.
A feat it only narrowly beat 5 years ago when it spent 20 consecutive days, from early November to early December 2004, above 90%. It managed to create a top at $457 that lasted almost 10 months. And to think, back then it was only 12% above its long term moving average while now it is 23%.
As well, ETFs devoted to gold (the favourite method to gain exposure for the average gold investor) have increased almost 50% in holdings from last year to 1766 tons. While I believe that gold is in a bull market, no bull market goes straight up. Right now, this trade has become too crowded.
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