It seems you have JavaScript disabled.

Ummm.. Yeah... I'm going to have to ask you to turn Javascript back on... Yeah... Thanks.

Sentiment Overview: Week Of October 3rd, 2008 at Trader’s Narrative

Apologies for the delay, I’ve been trying to keep up with this fakakta market. Here is this past week’s sentiment overview:

Sentiment Surveys
The AAII survey for this week showed only 33.33% being optimistic (bulls), and again, a whopping 55% thinking that the market is going to continue to go down. If you recall, historically, anything above 50% bearish sentiment is very significant. However, sentiment in a bear market is different than that in a bull market. So adjust your lenses accordingly.

The sentiment survey of Investor’s Intelligence by ChartCraft showed only 33.7% bulls and 47.2% bears (with the rest sitting on the fence).

Before we leave surveyland, it is important to note that something has truly scared the average American investor because not only are they very pessimistic as described above, they are now positioning their portfolios so defensively, it has only happened a few rare times. They are holding a +35% in cash, only 51% equities and the rest in bonds. The last time we saw a lower equity allocation for these guys was way back in the throes of the last bear market (late 2002) where it reached into the 40’s.

Options Continue to Confuse
On Friday, as the market continued to bleed, the ISEE sentiment ratio came in at 119, meaning that retail option traders were comfortably buying more calls to open positions than puts!

And the CBOE put call ratio (equity only) came in at an anemic 0.79!

So the options markets continue to confuse the heck out of everyone. I’ve read as much as I could find about it but either people are scrambling valiantly to explain it with outlandish theories or they are outright ignoring it.

The best alternative theory I’ve heard put forward is from Barron’s:

I mentioned sentiment being fearful earlier and certainly the Chicago Board Options Exchange volatility index, aka the VIX, registered some extremely high readings this week. Dubbed the “fear index,” when the VIX reaches extreme highs it often marks a bottom of some kind.
Finally, something for the bull column.
But can we truly believe the VIX, which is based on options premiums? After all, investors are no longer allowed to sell more than 1000 stocks short thanks to a temporary ban. One of the few places to hedge a portfolio is in the options market, and that may be changing the VIX in ways we just cannot know at this point.
Anecdotally, I don’t see the “get me out at any price” fear in the mainstream and financial media. Investors are fearful, but I don’t think they are truly as panicked as we might believe.
So, the scales seem to be tipped for the bears, keeping capital preservation tops on my list of investment activities. The final word from Washington could change things in a hurry, but from the technical evidence we have, this bear market is not over.

The What Spread?
This is truly scary. The TED spread continues to go up. The what spread? Yeah, that’s what a lot of people are wondering too. Take a look at the chart showing the trend of this search query in google’s search engine (worldwide). At the beginning of September, things go bonkers:

ted spread google trends explosion in interest from public

The reason I say scary is that it is creeping higher rather than spiking higher. That makes it difficult to know whether the trend has exhausted itself.

Magazine Covers
time magazine cover october 2008 bread line 1929 comparisonA qualitative contrarian sentiment guide is the magazine cover. Ideally, it will be tremendously pessimistic and have wide, general public circulation. This week, the only one fits the bill is the Time magazine cover of the 1929 soup line with the title: “The New Hard Times”.

economist cover world on edge Oct 2008forbes magazine cover whats next Oct 2008
business week cover Oct 2008 wooly mammoth wall st.pngThe Economist and Forbes are arguably specialty magazines but their most recent editions’ covers are pessimistic as well. Although, the Forbes one does show the chart going up towards the end. And the article that corresponds with the cover, also hits some optimistic notes, mentioning the large amount of cash on the sidelines (more details on the cash cushion here). So, as pessimistic covers go, it doesn’t really qualify fully.

Enjoyed this? Don't miss the next one, grab the feed  or 

                               subscribe through email:  

4 Responses to “Sentiment Overview: Week Of October 3rd, 2008”  

  1. 1 Yiyu

    Dear Babak,
    About the contradictory signals from VIX and Put/Call ratio as you talked about today, I venture an explanation: there’s a difference between uncertainty and fear.

    VIX is more likely to be a measure of uncertainty/risk, As Dr. Steenbarger said today: , ATR is also at the historical high. Same with VIX as volatility measure, it makes no sense to think ATR is a gauge of fear.

    On the other hand Put/Call ratio is more likely to be a gauge of fear of small investors, since it shows how they think about the direction of the market.

    So the real question is: which one, uncertainty(risk) or investor fear, usually marks the bottom of market? Of course most of the time uncertainty are accompanied together with fear, but this time we see a clear difference.

    In my opinion, it’s historical level of uncertainty marking the bottom of stock market, since speculators are really awarded for taking higher risks.

  2. 2 Anon

    Babak, can you please cite or link to your source for “average American investor [is] holding a +35% in cash, only 51% equities and the rest in bonds. “

  3. 3 Babak

    agree with you re ATR not being a gauge of fear. But if you look at the historical pattern, market bottoms do occur near (but not necessarily coinciding with) high put activity relative to call activity. Also, the ISEE is better able to isolate retail option traders activity and as I’ve mentioned it several times now, it is baffling many in showing not only no fear, but slight optimism - as the market continues to fall! This is downright weird.

    oops! I should have mentioned that it is according to the AAII survey - they also ask their members for allocation info as well as bear/bull sentiment.

  1. 1 » Blog Archive » Good Blogosphere Reads

Leave a Reply