We went from lukewarm, boring sentiment overviews to white hot. As the saying goes, “May you live in interesting times”.
I complained in last week’s sentiment overview and the VIX responded giving us a real spike to 42.16 (VXN to 40.44).
These are levels at which we can comfortably say there is true fear in the market. And although there is nothing to stop us from actually seeing higher volatility numbers, there is no doubt now that we have crossed into the serious.
CBOE Put Call Ratio
It was a little dissapointing to not see this measure of fear spike higher. The spike only took the equity only put call ratio to 1.18 - a respectable level of fear but not even close to previous records. For example, consider that going back just a few months to March 2008, we saw 1.35 - as well, the ratio collapsed to 0.51 by the close of Friday’s trading.
The ISEE sentiment index measures the level of interest from the retail options trader in calls and puts with the resulting number representing a fear index of sorts. Not surprisingly, Friday’s level of 66 is one of the lowest we’ve seen.
The record was set on March 10th, 2008 with a paltry reading of 56, meaning that almost half the amount of calls were traded to puts.
Previous ISEE ratios below Friday’s are:
March 8th, 2007 — 58
October 11th, 2002 — 60
August 22nd, 2006 — 63
And on March 7th, 2007 and July 3rd, 2007 the ratio was tied with (September 19th, 2008) Friday’s at 66.
What is remarkable is not the low number we saw on Friday because after all, that is to be expected when the market is in shambles, but that there is a total disconnect between the two. Let me explain. While the market was careening lower on Monday and Wednesday, the retail options traders as measured by the ISEE were yawning their way to actually trading more calls than puts, putting the ratio slightly above 100.
Then on Thursday and Friday as the stock market screamed higher, the ISEE ratio fell precipitously as the retail traders furiously bought puts over calls.
So can this possibly mean?
Assuming that the data is correct, one way to interpret it is that what we saw in the final days of the week was simply the mother of all short squeezes (courtesy of the US government).
It would be premature to interpret the seemingly bullish market action to mean that buyers have reasserted themselves and buried the sellers in an orgy borne of relief. As I mentioned when I railed against the government’s temporary ban on short selling, each share sold short represents a future buy order. What we saw in effect was all those future buy orders which would have naturally have been traded over months and weeks, jammed through in a matter of days.
So it seems that not only is the retail options trader not buying this rally at all, they are finally getting seriously worried.
Lowry’s 90% Up Day?
I got a lot of people asking me if what we saw was the endangered 90/90 up day as defined by Lowry’s Research. Intuitively it felt like one and the numbers bear it out - almost.
To be precise, we saw 89.5% and 87.8% upside volume on the NYSE which is 90% if you squint. I don’t want to go around second guessing valued indicators but I can’t help but get a nagging feeling that a rally caused by the government interfering with the normal working order of the market just isn’t genuine.
The Investor’s Intelligence survey results are as of September 16th, which was before Thursday’s harrowing down day. Still, there was a significant uptick in bearish sentiment with 43.7% of newsletter editors pessimistic and 37.9% optimistic. Next week’s survey will be much more meaningful as it will demonstrate whether the recovery by the end of the week is perceived to be the real deal or not.
The AAII sentiment survey came in for the second week in a row with more than half the respondents bearish: bulls 27.21% neutral 18.37% bears 54.42%. Within a strong bull market this would be enough to get any contrarian excited but we’ve seen +50% AAII bearishness this before and it has disappointing at times. But the historical pattern is still on our side with the market bouncing back impressively on average after similar situations.
Finally, the Hulbert newsletter sentiment index which measures a subset of the stock newsletters which time the market did fall to -36.6% at the beginning of the week but recovered to -35.9% on Thursday. This is meaningfully low but unfortunately it is not even as pessimistic as what we saw in July when the market was trading higher than now.
Undoubtedly we are seeing major fear in the market and trusted indicators are almost unanimously pointing to the same conclusion. What muddies the water is not only the severity of the financial crisis which dwarfs the others we have weathered previously, making comparisons moot, but also the internationally coordinated government interventions which interfere with the normal course of the markets.
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