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Bill L.
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Methodology: setups require certain criteria to be met before trades can be executed, which include weighted statistical studies on several indicators of price, breadth, volume, and sentiment . Amount of risk taken is proportional to how many indicators are aligned. I mainly trade market... More
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  • Friday, November 9, 2012 - Weekly Sentiment Report 2 comments
    Nov 10, 2012 1:00 AM | about stocks: SPY, DIA, QQQ, FXE, UUP, TLT, IEF

    The Put/Call Ratio ($CPC):

    The put call ratio measures the rate at which option traders are buying puts (bearish bets) compared to calls (bullish bets). This indicator is the most useful once it reaches extremes; when the market is topping investors are typically far too optimistic and when the market is bottoming they are far too pessimistic.

    (click to enlarge)

    Analysis: The put call ratio has been unsurprisingly climbing the last few days as option speculators have been scrambling to buy puts. The 5 DMA will likely reach extreme territory in the next few days.

    Grade: Bullish (though just starting to get bullish, it can definitely get more extreme than current levels).

    Investors Intelligence:

    Investors Intelligence is a weekly poll that surveys newsletter writers. While they are professionals they too are subjected to group think, fear, greed, excitement and all the other broad range of emotions that can hamper objective market analysis. One interesting note; when the market is topping, peak optimism is generally reached before the final index price high. This indicator works best as a contrarian indicator when extremes are reached.

    Analysis: Bulls have come off and bears have edged up, but the spread is best interpreted as neutral, perhaps slightly bearish. Seeing as how the bulk of the decline came after this figure was reported, it will be interesting to see how the decline affected news letter writers next Wednesday.

    Grade: Neutral.

    The American Association of Individual Investors (AAII):

    The AAII is a service that polls individual investors. Individuals tend to be more sensitive to price movements than the respondents for the Investors Intelligence survey, though the indicator works much the same way.This indicator works best as a contrarian indicator when extremes are reached.

    (click to enlarge)

    Analysis: The Bull/Bear ratio has recovered to the neutral territory, though after reaching a bullish extreme (last update) this indicator tends to mean revert and reach a bearish extreme.

    Grade: Neutral.

    CFTC Commitment of Traders (S&P e-mini contract):

    Every week the CFTC releases the aggregate futures positions of commercial hedgers, large traders, and small speculators. Since commercials and large traders tend to direct money flow, and small speculators tend to be terrible at market timing, it often pays to look at the juxtaposition of these groups.

    (click to enlarge)

    Analysis:Not much has changed from previous updated, commercial hedgers are betting on a flat/down market while the small specs are bullish, though this decline has caused the spread to come in some. Again, most of the decline occurred after these numbers were finalized, so we'll have to wait till next week to see how futures traders reacted to the Obama victory/decline.

    Grade: Assuming that commercials and large traders are the smart money, and that small speculators are the dumb money, I grade the COT report mildly bearish.

    National Association of Active Investment Managers (NAAIM):

    The NAAIM polls active investment managers. While this poll hasn't been around very long, its short history tells us what we already suspected; professional managers tend to perform no better than most individuals, they're over invested at tops, and caught short at bottoms. We can however turn their group think into something useful and use this data as a contrarian sentiment indicator.

    (click to enlarge)

    Analysis: Professional money managers reduced their net long position to just under 60%, a mildly bearish/neutral level. I'm grading this bearish since this measure tends to mean revert / oscillate pretty regularly, hence the likely direction over the next few weeks is down.

    Grade: Mildly Bearish.

    Short Interest:

    In the last few years ETFs have become a popular instrument for individuals and institutions alike to quickly and easily get long or short the market. Their overall popularity has skyrocketed, so it pays to pay attention to short interest in some of the most popular index ETFs.

    Grade: Short Interest is only updated twice a month and has not been updated since the last sentiment update, grade remains bearish.

    Rydex Nova/Ursa Ratio:

    Rydex provides several popular leveraged funds including the Nova fund (leveraged bull fund) and the Ursa fund (leveraged bearish fund). By comparing the net asset value of the two funds, we can get another view of what traders are betting on.

    Analysis: This indicator, like the put/call ratio is updated daily. We can see from the chart above that leveraged fund traders have absolutely fled the bullish funds and have flocked to the bearish funds. The intensity was last seen last June, which proved to be a significant low from which stock moved substantially higher.

    Grade: Bullish.

    Summary:

    We've looked at the options market , newsletter writers, individuals, the futures market, professional money managers, and ETF investors. This should provide a pretty complete view of overall market sentiment.

    Grades:

    • Bullish:3/7
    • Neutral: 1/7
    • Bearish: 3/7

    Overall Analysis:

    First off, hopefully there weren't too many errors, Norcal margarittas are addictive. Go Paleo, you won't regret it. Ok, getting to the analysis stuff, the more sensitive measure of sentiment have quickly collapsed to bullish extremes, while the longer term less sensitive sentiment indicators have come down to the "slightly bearish/neutral" area.

    First, let me just say that sentiment indicators are not nearly as reliable as timing indicators as most pundits regularly claim on TV. In my experience, they're best used as background indicators. Ok, that said, in a perfect world the outcome that resolves the discrepancy between these indicators is that short term, markets bounce, getting the shorter term players back on the long side, only to collapse again after one to two weeks of rally, ultimately declining to get everyone bearish just in time for the markets to rally.

    -Have a good weekend everyone,

    Bill L.

    Stocks: SPY, DIA, QQQ, FXE, UUP, TLT, IEF
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Comments (2)
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  • Author’s reply » A small request to regular readers, please help spread the word about my blog. My near term goal is to get into the top ten instablogers. Thanks in advance, and have a good weekend.

     

    -Bill L.
    10 Nov 2012, 01:45 AM Reply Like
  • Author’s reply » Taking a shot at the long side in after hours. Full update later tonight.

     

    -Bill L
    14 Nov 2012, 05:19 PM Reply Like
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