Doug Kass wrote today that Fear Makes a Comeback (by the way, you’ll find interesting links like that regularly over at news.tradersnarrative.com instead of in the regular stream of posts here). Doug points to the recent Robert Prechter interview in the New York Times. But I’m not so sure
We already looked at the previous week’s smorgasbord of sentiment data on Friday. Sure, there was a bit of give back as the market fell. Obviously the rise out of the lows at the end of June was being counted on my many to be the real deal (including this intrepid pajama wearing blogger). But we can’t really say definitively that there was fear out there. Not in any of the sentiment surveys and certainly not in the options market.
Last Friday, I didn’t show a chart of the options trader’s positions, so let’s go over them here. Since the hard right edge of the chart is difficult to see if I show too much data, I’ve zoomed in to only shown the ISE Sentiment equity only with its 10 day moving average from January 2009 to today:
The solid line represents the 10 day moving average which has been slowly rising since bottoming in mid June. As the chart shows, there is a decisive lack of fear. In fact, we can see a cluster of daily ISEE Sentiment index values around 200 - implying that option traders are sometimes buying twice as many calls as puts.
If burrow further into the data and look at the intra-day pattern, we see even more bullishness. For example, this morning, when the markets gapped up and ran back up to kiss the 1040 head and shoulder neckline, the ISE Sentiment index was 281. This means that we had almost 3 times as many calls being bought than puts! Then as the market weakened, the ratio fell to 268 and then lower still. But the daily value was 186, for a positive but very weak close.
The same complacent picture emerges when we look at the traditional put call data from the CBOE:
Since this is a put call ratio, instead of a call put ratio like the ISE data, it is the mirror opposite. Usually, for a lasting bottom we see at least a short term spike to 1:1 put call buying. But please note, this happens usually. During the previous bear market, the options market threw us a huge curveball: Crazy Options Market and even right at the March 2009 low: Option Traders Wildly Bullish. This is a conundrum that hasn’t been really resolved although more than a few valiant analysts have tried.
In any case, we can’t really say that there is ‘fear out there’ based on the options data. And based on other data there is outright bullishness. According to a recent research note put out by TrimTabs, retail traders who try to time the market using leveraged ETFs are actually betting on a market rally. Mark Hulbert wrote today:
According to TrimTabs estimates, which cover the week through last Thursday’s close, investors poured $434 million of new money into those ETFs that provide 3-to-1 leverage on the long side of the U.S. equity market, while pulling $355 million out of ETFs that provide 3-to-1 leverage on the short side.
TrimTabs also provides the caveat that this contrarian indicator has a very short term predictive quality. Any signals, like this one, usually are valid for a week, after which they start to degrade. So this is yet another piece of the puzzle that suggests to me that we are going to see short term weakness continue but eventually an intermediate low is coming up. I already mentioned that when breadth is this bad, it usually gets worse, before it gets better. And today, Wayne shared with us his PTA model which offers a similar scenario.
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