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Sentiment Overview: Week Of November 6th, 2009 at Trader’s Narrative

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This week the sentiment data brings a very intriguing turn of events so let’s get started:

Sentiment Surveys
The star this week is the ever so humble and common AAII weekly survey of US retail investors. This sentiment indicator sends extreme signals every once in a blue moon. So I guess you better check the night sky tonight because we haven’t seen so few bulls in this survey in a long time.

This week’s AAII results show only 22% bulls and a whopping 56% bears. The last time we saw this few optimists and this many pessimists was the week of February 19th 2009. Just before the spring rally. To put that in (even more) perspective, out of all the data that we have so far, only 4% of the time have there been less bulls.

Here is a chart of the bull ratio (bulls divided by the total number of bulls & bears):
AAII sentiment survey bull ratio Nov 2009

I’ve zoomed in to the past 7 years or so since showing the whole time series from 1987 would be overkill. From 2002 till now, there have been 8 instances where the AAII bull ratio was less than 30%. But as the last extreme reading in February suggests, it is best to not act in haste when presented with such a scrumptious contrarian gift. Historical data suggests that sitting on your hands for the next few weeks is the most prudent strategy (for longs).

I hope that I haven’t understated the gravity of this week’s AAII sentiment survey result because there is a high probability that it will once again prove to be prescient in pinpointing an upcoming inflection point. It is most definitely a tell that after a 55% rally we find the AAII bull ratio at such an extreme low when in early 2004 after a 37% rally from the 2003 lows the bull ratio was at the other extreme (see above chart).

The one puzzling thing is that the AAII asset allocation survey shows a slight uptick in equities (to 57%) while back in February when the bull ratio was so low last, it was closer to 40%. I guess the message the AAII folks are sending is that they like equities longer term but short term they’re very nervous. And that’s remarkable because of how little off we are from the year’s highs.

Investors Intelligence
While this week the AAII deservedly monopolized our attention, the measure of newsletter sentiment from ChartCraft is a snoozefest. The II this week is almost completely unchanged with 48.3% bears and 24.7% bears for a (yet again) bear to bull ratio of 2:1. I’m not sure how to reconcile these two disparate metrics but I do know that this is really nothing new as they often conflict with one another.

Hulbert Newsletter Sentiment
Thankfully, we have another measure of newsletter sentiment. Currently, the Hulbert Stock Newsletter Sentiment Index (HSNSI) stands at 3.2% - which implies that the average recommended exposure by short term timing newsletters is to be long 3.2% of their client’s portfolio.

Putting that in perspective, it is a decline of almost 23% points from two weeks ago when the S&P 500 index was about 1090. And it takes the HSNSI back to where it was on March 24th 2009. But if we go back a bit more to early March it was -20% (recommended exposure of being short the market). Then a bit further back to July 2008 with a truly extreme -43% HSNSI reading. So all in all, it isn’t as extreme as the AAII but it does suggest that the newsletter editors have, to a large extent, given up on the rally.

Barron’s Big Money Poll
Last weekend’s Barron’s had the semi-annual “Big Money Poll” which includes some very smart institutional money managers. But if you look at their group track record it is appropriate to call them the Big Money, rather than the Smart Money.

Currently they are rather bullish - so the title of Treading Carefully is a misnomer. About 60% of them are bullish, while just 13% are bearish which makes the bull ratio 82% - giving any contrarian long this market, an uneasy feeling. But before we can use them as a contrarian indicator, they have to present some form of correlation to the stock market.

They don’t. And that’s probably the most damning thing you can say about a sentiment indicator because it means that it is basically useless. So while you may respect the individuals who participate in the poll, it is a waste of time to analyse their aggregate position or to try in any way to glean something useful form it. With a heavy sigh, we have to relegate the Barron’s Big Money Poll to the round filing cabinet, along with the TickerSense Blogger Sentiment poll and the Citigroup Panic/Euphoria model.

Rydex Traders
The short term market timers who use the Rydex family of mutual funds have turned tail and swiftly gone bearish. The NAV adjusted ratio for the Rydex Nova/Ursa funds is now as low as it was in early July - just before the S&P 500 rallied off the 200 day moving average. Suddenly these twitchy traders have given up their usual strategy of buying any short term weakness. From a contrarian point of view, that’s a good sign for the start of a significant rally.

State Street Investor Confidence
This monthly sentiment measure from State Street (STT) monitors institutional investors and their attitude to risk. In October it fell to 108.4 from its August high of 122.8 and is back where it was in May 2009 (even though the S&P 500 index is much higher than it was back then).
state street investor sentiment index Oct 2009

For a longer term chart and more details check the following link: State Street Investor Confidence.

Options Sentiment
There wasn’t much movement in the ISE sentiment indicator this week. For further information and a long term chart, check out last week’s sentiment overview.

The CBOE put call ratio similarly nudged up slightly as fear re-entered the options pits. The short term moving average of the equity only put call ratio continued to rise slowly (from 0.637 to 0.67) but we still closer to multi-year lows.

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2 Responses to “Sentiment Overview: Week Of November 6th, 2009”  

  1. 1 dacian

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    All these sentiment indicators lately send mixed signals: it shows that speculators/retailers get in and out very quickly on each market move. The higher highs in VIX means there is no liquidity in the market (speculators and day traders can’t find to whom to sell; usually the LT investors buy there shares, but this time, as VIX says, they aren’t there and they might not appear for a while - see Grantham last letter).

    Hence, imo, the best strategy here is either to be very light on longs and not adding (eventually use stops) or even better, a long/short strategy.

  2. 2 Tyler

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    It seems that all of this adds up to a pretty negative sentiment environment (contrarily bullish). thanks for the summary.


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