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Where’s The Fear? at Trader’s Narrative

Where’s The Fear?

Doug Kass wrote today that Fear Makes a Comeback (by the way, you’ll find interesting links like that regularly over at 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:

ISE sentiment 10 day moving average Jul 2010

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:

cboe equity only put call 10 day moving average Jul 2010

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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12 Responses to “Where’s The Fear?”  

  1. 1 Mark G.

    The fear is the shorts worried about a Bernanke Sunday night, early Monday morning multi-trillion QE announcement

  2. 2 Anony

    The title of Kass’ piece was kind of a misnomer. while saying fear is back, he pooh-poohs it. In fact, he claims we have already made the low for the year. Not sure he is right.

  3. 3 luca

    ISEE complete figures are somewhat different and fear is priced in

    88 7/6/2010
    10-Day Moving Average 100 6/22/2010-7/6/2010
    20-Day Moving Average 97 6/8/2010-7/6/2010
    50-Day Moving Average 98 4/26/2010-7/6/2010
    52-Week High 185 4/15/2010
    52-Week Low 59 5/7/2010

  4. 4 PEJ

    Hi Babak,
    Thanks for your analysis. It confirms also the conclusions I have drawn here

    The percent bullish indices also show no fear. Barely average to slightly bullish sentiment.

    This happens after two months of continuous decline, and follow historical high bullishness, as shown by the historically low Put/Call ratio reading in late April

  5. 5 Babak

    Pej, thanks for the links, interesting analysis. The only thing that is jumping out at me right now is that the Rydex traders are actually heavily leaning bearish with a massive lopsided ratio between the Ursa/Nova funds. The sentiment cross currents are very confusing right now to say the least.

  6. 6 PEJ

    I’m not really familiar with the Rydex traders, but one way to play this would be to go long those Ursa/Nova funds? :-)

  7. 7 PEJ

    Also, quote from David Rosenberg’s today’s letter:

    He and the other guest talked about the “fear in the market,” but there is hardly fear; concern perhaps. When analysts are still raising their estimates and almost all strategists are still recommending at least market-weight equity allocations (those cutting their targets for the S&P 500, as we saw today from a big bank, still see 15% upside through to year-end) and economists are trimming their GDP forecasts to 2.6% (for true “fear”, call us when they out a minus sign in front of that number as was the case in the opening months of 2009) there is no capitulation at hand at all, even though that is what the bulls would desperately like to see since their “cheap” valuation arguments don’t seem to be having much impact. Besides, since when is valuation ever a good timing device?
    As one example, a lead article on Bloomberg today reads Double Dip is Unlikely, Credit Suisse Private Says … and the first sentence reads: “Expectations for a ‘double dip’ recession are over pessimistic …” When we brought this up to Larry, his response was that it seemed from the “market chatter” that there was lots of fear in the air.

  8. 8 PEJ

    Sorry for all the noise I’m generating by putting in so many comments…

    Here’s the latest from Goldman (via zero hedge)

    The best news first: the model shows essentially zero probability that the economy is currently in recession. Payrolls have generally been expanding in recent months and the unemployment rate has actually come down slightly. This is unlikely to be a controversial conclusion for most market participants and so we will not dwell on it further.

    More surprisingly, the model also shows a very low probability (1.6%) that the economy will be in recession six months from now.

  9. 9 Wes


    I don’t follow the equity only part of the ISEE sentiment, but I do follow the ISEE index options. For some reason unknown to me, these public traders dove deeply into the bear cave back in 2006 and have never come back out.

    I use a 15 DMA. On this basis the absolute minimum barely optimistic call/put ratio is 180 based on the historical record. The highest it has been in the past 4 years is 160 on a single occasion in 2007. This indicator once gave 15 DMA optimistic signals above 220.

    About all I can gain from this indicator anymore is if sometimes goes from very fearful to even more fearful.

    I suspect the public is so not participating in the market as to make these indicators almost useless.

  10. 10 AB

    I think the total put-call ratio a better gauge of market sentiment. After all, it’s not the dumb retail money that you want to fleece, but the deeper pocketed smart money that are acting dumb, whose pockets you want to get into. And it’s the smart money acting smart, whose wagon you want to ride.

    I use 10-day and 50-day exponential moving averages of this put-call ratio with this; the 10-day MA forged a weaker bearish extreme (weaker than that in late May) during last week’s selloff, and the 50-day is staying right about at 1.0 - neutral. The 50-day has not gone above 1.0 since September 2008 (do we remember that month???), and it dropped below 1.0 in December 2008 - 3 months before the broad market bottom. That is 18 months of being on the bullish side and it is trying to continue its streak.

  11. 11 Gary

    As a 25 year Registered Representative with a large book retirees and soon to be retired the phone calls I’ve received over the last three weeks are worse than what I received during the Lehman fiasco. I don’t understand where pundits get the idea that investors are complacent. They evidently aren’t answering the phone with actual stressed clients on the line thinking “Oh no not again”. They are disgusted by the “Flash Crash” and program trading. The lack of focus on “jobs, jobs, jobs” and experience in the business world by all members of our Executive Branch is equally distressing. On the next bounce in the equity markets most want to reduce an already low equity weighting and settle for 1% returns. My pleas to at least maintain current positions are falling on deaf ears. Confidence in our current leadership is gone.

  12. 12 Babak

    Gary, thanks for your input. It can be difficult for those of us who don’t have to field calls like that to get a good understanding of where most people’s emotions are. That’s why we use these sentiment surveys and indicators. What trends have you noticed? are your clients staying the course and nervous? or are they actually moving money from equities to cash/bonds?

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