Sentiment Overview: Still Too Many Optimists

Sentiment Surveys
The retail investor’s sentiment as measured by the weekly AAII survey saw the bulls at 38% (a drop of 7% points) and the bears at 43%, with a 10% point increase. While this is a small increase in bearishness, when you consider that we are still very close to an important support level, it is disappointing to see so many optimists.

The Investor’s Intelligence sentiment, which measures newsletter editor’s sentiment, was hardly changed with 31.9% bulls and 46.1% bears. While contrarians may not like the fact that there has been a mad dash away from extreme pessimism in these sentiment gauges, there is another more lenient interpretation. According to Gray and Burke, the duo that reads and categorizes each newsletter editor as bullish, bearish or neutral for ChartCraft, the fact that we saw such a move may be normal. Previous market lows have seen such a shift as bulls increase over time as the market recovers.

ISE Sentiment
On Wednesday, when we stood at the precipice, looking down and the abyss looked back at us, the ISE sentiment data shows that we finally got some semblance of fear from retail options traders. On November 12th, 2008 the ISEE sentiment index (all data) reached 67 - which is on point above where the ISE ratio was on September 19th, 2008 when the S&P 500 Index was at 1255.

This historically useful contrarian indicator may be returning to its usual pattern. But frankly, I’m growing impatient as along with the rest of the options market, it has been acting crazy during this latest market decline. Since I prefer using the equity only data for the CBOE options data, I looked at the same for the ISE options data and came away with an interesting observation. For some reason, during the past six months, the data is within a much narrower range than before:

I’m not sure what to make of this but there it is. I’m sure brighter minds out there will see the significance and perhaps decide to share their insight.

But just so there is no confusion, the low I mentioned before (67) on Wednesday was for all data (equity, ETF and indices options), not just the equity data.

Comments

[John Lounsbury:]

Some thoughts:

1. The narrower range might be something akin to base building on a price chart for a stock. One possible argument against that is that the lows of this range are above 100, whereas the recent lows before the range started were much lower, arounf 60 or so.

2. The recent range actually has a flat base but a decending series of upper limits. This looks like a descending flag in a longer term descending pattern. This is a bearish pattern.

3. If the pattern does move to much lower lower sentiment will the contrarian indicator do a better job than it did in early 2008? Then we twice hit levels around 60, but the rebound in sentiment was very short lived and dropped back into the current range by May.

4. Perhaps we need a negative sentiment extreme that lasts more than one week to get a better wash out in price and a longer lasting rally.

2008 Nov 16 12:16 AM

[Houstonnotny:]

One economic factor which has yet to be recognized is the immediate future for positive economic performance. People are spending less, and may split funds between savings and consumption. Credit conditions have been tightened; some have had their credit lines reduced or otherwise lessened; and I believe some lingering credit issues remain outstanding. ((For example, at one point, Citigroup was said to have a $1.2 trillion SIV-CDO or CMO - derivative position. That issue, unless I am mistaken, seemed to disappear. This is potentially worrisome.)) Regulations, including SOX, are exercises of perception; legitimate analysis, one might expect, could - would have identified part of this mess. How does AIG, for example, back about $500 billion of this sub-prime mortgage paper -- when charging fee's of between 2 and 3% of the principle amount (I'm not sure what the real numbers were, but they were low.)) IF AIG went down, one author suggested that Goldman would have taken at least a $10 billion hit. Who knows; this might be true; and it might not me. At this point - it is simply speculation -- in my opinion.

IF events worsen, which I believe is more likely than not, this would confirm the "errors" of the bullish crowd; possibly explaining the sentiment level as well. What worries me here is the failure to intervene in areas of need, at the demand level. Demand will not simply rebound overnight.

The economic news out of China is simply "loud noise." The Chinese suppress demand; the focus is on the export market. Even with the best intentions, a rapid change is unlikely. Focusing on infrastructure development, as did the U.S. from at least 1861 forward, would stimulate the domestic economy far more than the international one. IF domestic demand is suppressed, these policies will promote job growth in China, even possibly offsetting some job losses.

I sincerely believe that the true severity of this downturn has yet to be understood.

If there is any good news, it might be that once a sharp sell-off does occur, the rebound might be equally as pronounced -- for securities as well as commodities, including precious metals.




The deflationary forces are not simply going to disappear overnight. IF SO, even precious metal prices could potentially drop by about 1/3rd. I'm hopeful, but Bernacke, if he was truly a student of the Great Depression, would have, or at least one would have been expected, to recognize the severity of this problem. Few realize that the severity of deflation played in a role in the 1929 -- when the FED -- almost instantaneously --withdrew approximately 33% of the nation's money supply (Nathan). The FED policy continued in anti-inflationary stance -- roughly -- into the 1932-33 era.

Biographies do not fix structural issues; yet the press assumes that one can simply push a button, and make things better. If Bernacke really "is" a student of the GD -- his actions are falling far short of his purported knowledge.

2008 Nov 16 06:40 PM