Sentiment Overview: Consumers Extremely Pessimistic Entering Holiday Season

Before we say goodbye to not just a bad October but the worst month since the 1987, here is a quick roundup of the sentiment landscape:

Sentiment Surveys
According to ChartCraft, the Investor’s Intelligence sentiment survey shows newsletter editors little changed in their outlook this past week: 23.1% bullish and 52.7% bearish. That is still an extremely high level of pessimism for a normally cheerful bunch. Remember, doom and gloom doesn’t bring in the subscription coin.

The retail investors on the other hand continue to be nonchalant. The AAII weekly sentiment survey showed a small uptick in bearishness to 40.6% and a small downtick in bullishness to 37% but still the over all mood is way too cheerful for me. As a contrarian I’d be much more comfortable to see the average person continuing to be pessimistic about the market before getting too excited about a lasting rally.

Options Market
Like many, I continue to wrestle with the options market, trying to make some sense out of the data it generates. For more, check out not only my own thoughts about this crazy options market but some of the most respected technical analysts out there today.

The ISEE sentiment continues to be ambivalent about this whole chapter in the stock market. I have no idea why but it has totally broken down and although I continue to watch it, it is tough to ascribe a rationale for its moves or to glean a message from it.

The CBOE put call ratio (equity only) went up on Thursday and Friday implying that options traders on average were not totally buying the most recent rally.

Short Covering or Real Buying?
The reluctance to see Tuesday’s rally as “real” is shared by many. After all, the majority of the biggest one day gains in the stock market have occurred during brutal bear markets. A reader contacted me wondering if it was “just short covering” or “real”? I’m not sure if it makes much of a difference. The short interest ratio for the Nasdaq is very high, which is traditionally a bearish omen. Any other ideas on how to distinguish between a “real” rally and a short covering one?

Lowry’s 90/90 Day
The market continues to make people stare at their screen like goldfish, widemouthed and blinking in amazement. Tuesday’s rocket ride sure felt like a 90-90 up day, which according to Lowry’s research is a prerequisite for a new bull market. We’ve seen repeated 90-90 down days but finally got a decisive buying stampede. Up volume demolished down volume by a ratio of 19:1 - the most exaggerated ratio since last year.

If you still haven’t, read Paul Desmond’s seminal work in my free trading resource section (Reports & Articles)

Consumer Confidence
This should be an interesting holiday season for the retailers. The American consumer is not only incredibly dissatisfied with everything in general, they are extremely pessimistic about the future. Like so many other indicators we’ve been watching during this bear market, the Conference Board Consumer Confidence (Expectations) plunged to its lowest level ever.

That is lower than the aftermath of the 1987 crash, the bear market in the 1970’s and the public’s reaction to the tragedy of 9/11. Which says a lot. Consumers are basically shell shocked. The spending orgy, fueled by easy credit, is gone. Now comes the hangover.

From a short term perspective this may appear to be bad news but historically troughs in consumer sentiment have been a great contrarian indicator. After I mentioned it as a condition of a new bull market, it rebounded briefly but the message is unmistakable.

Greybeards
In the past few weeks we’ve seen Warren Buffett, Doug Kass and Steve Leuthold all saying pretty much the same thing: they are buyers. Which leaves one wondering. If you are going to fade these guys, you better be incredibly lucky and incredibly smart. It is possible they are wrong - but highly, improbable.

Comments

[sr9web:]

The point you are missing is that the small investors feel betrayed by the big Wall Street firms. Those guys were key enablers in the creadt collapse and the RE bubble and yet nothing is happening to them. Most players will get new big $$ jobs and the firms will merge/rebuild, but the capital of the small investors has taken a very serious hit.

Unlike the dot.com bubble, small investors were not playing with the house money this time. this market collapse has cost many, many people a substantial amount of their original capital.

And the extreme volatility being stoked by big traders make "buy & hold" useless.

Currently, except for a few key dividend paying stocks, there is no valid rationale for the small investor to get back into the market long term.

Better to trade in/out, staying in cash as much as you can. When RE finally bottoms in 2 years, for many people, it would be better to buy some select multi-family rental property, than to trust the stock market with too much "buy & hold".

Buy & hold for what.... the next giant crash?

I'm trading and making some gains, but the huge YTD market collapse has me underwater just the same.

How much worse off is the typical small investor who just goes long and sits there?

2008 Nov 02 06:54 PM

[Steven Hansen:]

with the investments of Warren Buffett, Doug Kass and Steve Leuthold et al, they do not benefit with down markets. Just like in 1929, the big boys then went on a buying spree to show the fundamentals were right. there are pumpers all over the market yelling buy.

this is still a traders market - not one for the little guy investor. anyone with a little grey matter sees the economy falling, other financial uncertainties, and a new economic team coming to town. hey, if i am wrong i will lose potential profit - if i am right, i get to keep my money.

buy if you want right now. i will wait because i still see nothing positive out there.

2008 Nov 02 08:58 PM