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Sentiment Overview: Week Of October 30th, 2009 at Trader’s Narrative

The market correction that we’d been waiting for has finally started in earnest so let’s take a look at the sentiment data for this week:

AAII Survey
This week’s survey of US retail sentiment by the Association of American Individual Investors came in at 34% bullish (a drop of 7% points from last week) and an increase of bears to 42% (a 6% point increase). While the increased fear is normal after the kind of week we had, the ratio of the two remains neutral. Had the response been either muted or exaggerated, it would have been more interesting. At this point, it doesn’t really offer any edge.

Investors Intelligence
The latest Investors Intelligence poll from ChartCraft showed the bull share fall a smidgen to 48.3%; the bear share also fell a hair to 22.5%. Only 29.2% believe a correction is due. The ratio of the bulls to bears is 2.15 - higher than it has been for months. It must be noted, though, that the survey was compiled on Tuesday before the losses later in the week. Next week’s survey will reflect the full decline.

Daily Sentiment Index
The Daily Sentiment Index remains in rarefied territory. The high levels we find the current DSI is extremely rare. In the 22 year history of this metric the DSI has been 87% or higher, only five times:

daily sentiment index chart Oct 2009

Hulbert Stock Newsletter Sentiment
The subset of newsletters followed by Hulbert which try to time the market is showing a remarkable retrenchment. We briefly looked at this metric in last week’s sentiment overview, where it was at 32% - meaning that the average market timing newsletter was suggesting to their clients to have only 32% of their portfolio long the market.

This week, the Hulbert Stock Newsletter Sentiment Index has fallen to 19.4%. The last time they were recommending this market exposure was a few months ago in July. This bodes well for the continuation of this rally as it seems that newsletter editors are ready to throw in the towel.

Consumer Confidence
The October Consumer confidence came in much lower than the expected 35.5%. It fell 5.7% points to 47.7%. This was the second month of decline and the largest monthly fall since February. As well, both the present situation and the expectations index declined.

It seems that unemployment and an anemic recovery are weighing heavily on the US consumer as the present situation index fell to a historic low not seen since February 1983. It also has the distinction of being among the lowest 6 readings in the index’s 42 year history.

Bloomberg Sentiment Poll
A random sample of 1,452 Bloomberg subscribers surveyed believe that commodities will offer a higher return next year than equity markets:

bloomberg poll asset class Oct 2009

By now most have realized that stocks have gone nowhere for the past 10 years and will probably perform just as well in the next decade. Which dovetails nicely with the commodity/equity cycle which lasts about 20 years.

Options Sentiment
The 10 day moving average of the ISE sentiment index (equity only) which measures retail option trading activity reached a high of 202 last week (October 22nd) but ended this week down to 175. This takes us back to the levels which we last saw in early October and early September:

ISE sentiment 10 day moving average Oct 2009 last

While it eventually lost the 200 perch which it had tenaciously clung to for over a week, overall it is still quite elevated. And if you notice on the chart, it is still maintaining the clean uptrend from last October.

CBOE Put Call Ratio
The more traditional, CBOE put call ratio also rebounded as fear entered the options market (finally!). Perception had become so optimistic the 10 day moving average of the equity only put call ratio almost hit 0.5 similar to the ISE sentiment above, implying that for the past 10 days, traders were buying twice as many calls as puts.

I’m glad things calmed down because any more of this and the CBOE would have probably erupted in an orgiastic explosion, releasing lollipops, rainbows and unicorns. But even so, stepping back to get some perspective, we see that all this recent uptick in put buying has only managed to bring us back in line with the multi-year uptrend line. Nothing more.

Finally, not surprisingly, we saw an uptick in the VIX as fear entered the markets (just in time for Halloween). After months of dripping lower, it brings us back to levels in July. And if you zoom out even further, you can notice that the VIX is starting to form what looks like a saucer or bowl formation.

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2 Responses to “Sentiment Overview: Week Of October 30th, 2009”  

  1. 1 Lynn

    “…any more of this and the CBOE would have probably erupted in an orgiastic explosion, releasing lollipops, rainbows and unicorns.” ROFL!! Thanks for adding some laughter to my financial reading today.

  2. 2 Babak

    you’re welcome Lynn :)

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