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Sentiment Overview: Week Of September 12th, 2008 at Trader’s Narrative





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The neutral and meandering sentiment landscape continues…

CBOE Put Call Options
Let’s start with the one sentiment indicator which showed some form of conviction this past week: the CBOE equity only put call ratio. Last Tuesday, it almost reached the coveted 1.0 level:

cboe equity only put call ratio september 2008

Although it came a hair short (0.99) it still approached extreme levels which have denoted important turning points in the market. The only caveat is that there are certain rumors that most of the puts had to do with the Lehman’s (LEH) meltdown, so it is dubious how much general negative pessimism this indicator expresses.

Volatility Index
The VIX and the equivalent Nasdaq volatility index, VXN, have yet to even come close to the high 30’s range which is what we watch for as important gauges of real fear. Right now, this important indicator is not showing enough of an elevated level of fear to merit any of our attention.

Sentiment Surveys
The Investor’s Intelligence newsletter sentiment is little changed with 38.2% bulls and 41.6% bears. The AAII is a bit more bearish which is favorable, taken from a contrarian perspective. But we still do not have the crystal clear lopsided sentiment that true contrarians relish.

Inverse ETF Trading Volume
Trading volume in inverse ETFs has exploded. These ETFs provide reverse performance - for example, Short Dow ProShares (DOG) attempts to give investors and trades the inverse of the Dow Jones’ returns.

These are the vehicles of choice for traders who aren’t familiar with short selling, or perhaps not comfortable with the idea or do not have the margin required. By going long these inverse ETF’s they can in effect, establish a short position. Not surprisingly, when the trading volume in these type of ETFs spikes, it is a sign of pessimism in the market by a select group of participants.

Currently, present inverse ETF volume levels correspond with market turning points in the S&P 500.

Conclusion
Still mired in the middle. Nothing truly compelling for either the bears no bulls. With the resolution of some of the uncertainty surrounding Lehman Bros. (LEH) over the weekend, we can hope that the fog lifts a bit.

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5 Responses to “Sentiment Overview: Week Of September 12th, 2008”  

  1. 1 Bill K

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    Babak, I have been using the VIX, VXN, and put/call ratios to time intermediate and long term market bottoms for over a decade. When used in conjunction with sentiment/panic observed in the market they are great contrary indicators to time new bottoms on fresh lows. From 97-03 it seemed like the NASDAQ was the only market for traders and I watched the VXN more closely as it tracks volatility for the NASDAQ, as you know.

    I actually used to post on Raging bull in the early 2000’s during the bear market about detailed historical market research that I was doing at the time. Back then I was looking for a VXN above 80 in conjunction with a 1.00+ on the regular put/call ratio as a sure sign of a near term bottom.

    I point this out to make the point that I am not new to interim bottom spotting. But the main problem we have right now is that those indicators are all best at spotting bottoms while carving out new lows. When you have a double bottom/retest, as is the case right now these indicators are far less effective at helping you verify that it is a bottom. The reason is simple, you have many TA chartists that are buying near that low to see if the bottom holds. If it doesn’t they sell and lose 2-5% at the most. So you will not see that group panic until it breaks below that July bottom of 1200 on the S&P 500. So overall the panic indicators will show less fear, which is exactly the situation we are in right now.

    That is where the analysis of why we are where we are and the gut feel of this game comes in to play, in my opinion. I know you have said before that you are not much on using a gut feeling to make decisions like this, but in my opinion some times the data will not give you enough information to make a clear decision, hence the current market confusion by everyone. But even if we take out my opinion and just look at the double bottom strategy, the “bottom is in theory” is innocent until proven guilty. So your downside is limited at this point and if proven wrong you bail out.

    Just my thoughts on the matter.

    P.S. Short ETFs are great for IRA and 401k accounts that you are not able to margin or short in. I have an IRA roll over account from a 401k and a regular IRA that I have built up over 20 years and I have used those ETFs in these accounts. They are a much better choice then buying puts, which you can do in those accounts. I find that when I want to short or go long the market lately I prefer to use double short or double long market ETFs even in marginable accounts. This allows me to use half the capital for the same result without paying margin costs. I did day trading from 98-01but these days I tend to be more of a swing trader, although I do some same day in and out trades I am more likely to hold for a few days to a few weeks/months. I have a decent position in QLD right now which is double long the QQQQs.

  2. 2 Ron

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    That is where the analysis of why we are where we are and the gut feel of this game comes in to play, in my opinion. I know you have said before that you are not much on using a gut feeling to make decisions like this, but in my opinion some times the data will not give you enough information to make a clear decision, hence the current market confusion by everyone. But even if we take out my opinion and just look at the double bottom strategy, the “bottom is in theory” is innocent until proven guilty.

  3. 3 Ron

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    I know you have said before that you are not much on using a gut feeling to make decisions like this, but in my opinion some times the data will not give you enough information to make a clear decision.

  4. 4 Bill K

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    Well the data has finally made a verdict. This has been text book panic, blood in the streets selling the past 2 days. We broke a trading volume record yesterday and then again today. The Put/ Call ratio never got below 1.3 in the past 2 days, even on the positive close. The VIX has been from 30-34 for both days too. All of these stats are showing undeniable sheer panic in the markets on record volume. We got the close below 1200 on the S&P 500 yesterday but we also had the kind of panic (we have all been looking for) that a contrarian trader can only buy in, not sell. Today the Dow and NASDAQ temporarily violated their 52 week lows and pulled back strongly to close positive. There is always a different reason why the panic comes, but as always, the reason needs to be ignored. The market is preparing for a nice rally.

    In my opinion today was the final capitulation day of this double bottom retest.

    Bill K

  5. 5 Bill K

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    We actually missed the Dow 52 week low by 10 points. That’s close enough for a retest.

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