Sentiment Overview: Mired in 'No Man's Land'

A quick summary of all things sentiment-wise for the stock market this past week:

Sentiment Surveys
The mind set of the retail investors as measured by the weekly AAII sentiment survey shows little change. We had an increase of 7% points for the bearish camp to 46% and a decline of 6% points for the bulls to 33%. Which is not very helpful as it leaves us mired in “no man’s land” - exactly where we’ve been for the past few months.

In contrast, the Investors Intelligence weekly survey of newsletter editors continues to be dominated by optimism. This week we had a small reduction in the bullish camp to 44.8% and a small increase in the bearish camp to 26.4%.

Bond Bears
For what is happening in terms of sentiment in bonds, check out the post from a few days ago: bond sentiment.

Options Sentiment
CBOE put call equity ratio: We got a slight ‘blip’ on Thursday (June 17th 2009) when this ratio hit 0.88. That’s not even close to a level which would get any contrarian excited. But it is the highest level of fear shown in this indicator since early March 2009. Keep in mind though that this trusty indicator has been firing blanks throughout this bear market.

ISEE Sentiment index: the equity only call put option ratio from the ISE reached a low this week we haven’t seen since November 2008. Remember, this is inverse to the usual put call ratio so a large number denotes optimism and a low number fear. On Thursday the ISEE Sentiment index reached 92 (meaning 92 calls purchased for every 100 puts purchased to open a retail options position).

This dovetails with the technical indicators that are also showing a very short term oversold condition in the market. The key is how the market reacts as a result: will it use it to bounce strongly higher? or collapse lower in spite of it?

Secondary Market
The doors of the IPO market have been shut tight for many months now. And although we are seeing the door budge open again slightly, the real action has been in the secondary market.

According to TrimTabs, last month saw a record shattering $64 billion dollars of IPO and secondary market offerings combined. To put that in perspective the previous monthly record was just $38 billion. While TrimTabs didn’t provide a sector breakdown, I suspect that most if not the vast majority of the record issuance was in the financial sector.

Historically, there is an inverse relationship between the primary and secondary market activity and forward market performance. This isn’t surprising since at the heart of the market, once you remove all the noise, is a simple supply and demand equation. There are a finite number of dollars chasing a finite number of shares. If you tip the balance in one direction, the market will react eventually.

According to two methods of analysis (from TrimTabs and Ned Davis Research) we are seeing a historical extreme that has only been seen before quite rarely. For more details, check out this article by Mark Hulbert. My only criticism of this analysis is that they use nominal numbers instead of ratios.

Since the market generally rises over time (recent history excluded), it isn’t helpful to compare the secondary market in say 1998 in dollar terms to that of today. The way we can equalize it is to look at the ratio of the secondary market to the total market (for example, the total equity value of the S&P 500). In this way we can easily compare across decades and get a more accurate idea.

This criticism notwithstanding, since the other extreme readings come from relatively recent years (2000, 2008, etc.) we can conclude that a ratio analysis would yield little improvement. The conclusion stands that Wall Street is suddenly awash in ‘paper’. I’m sure some will come up with conspiracy theories of this spring rally being rigged to allow for the recapitalization of the ailing US banks. But remember what Ben Graham said about the stock market: “In the short run it’s a voting machine, but in the long run it’s a weighing machine.”

Comments

[E Nuff Sed:]

Another way of looking at this is that because of the supply of paper the rally has stopped in its track in recent weeks. If it was not for the additional paper the rally would have continued. What I do not understand is why would the market collapse when obviously the market has been able to absorb the record amount of paper being thrown at it.

Jun 21 03:46 PM

[logicalthought:]

My response is that this is an issue of timing, in that it was going to take the market a few months of "second derivative improvement" (during which there was "time for" a rally) to realize that even if the economy is almost done "getting worse", it's going to stay at this awful level for several more years. So, if we hadn't had all that follow-on supply the S&P might have reached the 1100 level rather than 950 or so, but either way, once it sinks in that the current awful earnings are going to stay awful, we're going to have some severe PE multiple compression (after all, without growth you may as well own debt-- especially considering where Fed borrowing requirements are about to send rates), and thus I think we're going to revisit and then take out the March lows. How does a 10x multiple on $45 to $50 S&P earnings sound? (That's where I think we're going.)

On Jun 21 03:46 PM E Nuff Sed wrote:

>>If it was not for the additional paper the rally would have continued. What I do not understand is why would the market collapse when obviously the market has been able to absorb the record amount of paper being thrown at it.<<

Jun 21 05:58 PM

[contracontr...:]

" at the heart of the market, once you remove all the noise, is a simple supply and demand equation. There are a finite number of dollars chasing a finite number of shares. If you tip the balance in one direction, the market will react eventually."

There was a record amount of stock buybacks and corporate buyouts in 2005-2007,thus reducing supply of shares - same logic applied...

Companies often issue shares or do IPOs,when they believe their shares overvalued.This time financial execs have no other choice,it's more like forced selling - historical comparisons are probably misleading here.

Jun 21 06:04 PM

[RiskReturnO...:]

Developments in Iran will drive near-term sentiment ... if the geo-political risks increase and oil prices escalate, prepare for big pullback in SPY ... best strategy remains defensive while monitoring key developments in Iran and rest of Middle East.

Jun 21 08:47 PM

[Henry Buttal:]

Vis a vis the Ben Graham statement, I think part of the current "voting' sentiment will reflect not only short term concern about the geopolitical situation in Iran, but about the general actions of the current administration.

Finally, GS announcing the largest bonuses ever looks like sure sell sign to me. I don't know about the taking out the March lows, but I think back to the mid to low 800s is almost a given

Jun 22 02:41 PM