Sentiment Overview: Insiders Decisively Bearish

Includes: DIA, QQQ, SPY
by: Babak

Oh boy, there is a lot to cover this week, so let’s dive in to the sentiment summary:

Sentiment Surveys
The most recent AAII weekly sentiment survey brought the retail investors’ mood in line with the newsletter editor sentiment (from Investors Intelligence, below). A rather small portion of the AAII respondents were bearish: 28%. Meanwhile, the optimistic bulls were almost unchanged at 42%.

The last time we saw a similar lack of bearishness was in April 2008 and September 2007. Both were tops before another leg down. If we step back and gain a longer term perspective though, this amount of bearishness is actually not approaching any extreme. Instead, it is more or less the average of bearishness we’ve seen from the AAII. It is hard to remember, since we haven’t seen it in a long time, but AAII bearishness can fall to as little as 10%.

Investors Intelligence
Last week we took a long term look at the Investors Intelligence data which helped to place the most recent results of the survey at the extreme end of the spectrum. This week it continues with more than 3 times as many bulls as bears. It is hard to not get cautious when you realize that the last time we saw this was late October 2007.

This week there were 52.2% bullish and 16.7% bearish and 35.5% expecting a correction. This third option, often overlooked, is the key. I mentioned in the last sentiment overview when it was only 35.1% that we hadn’t seen such a large group since 1992. And this week, it is larger!

Consumer Sentiment
The University of Michigan consumer sentiment report for December (preliminary) was better than expected at 73.4%. While it is up from November’s 67.4%, it is not higher than September and is in fact, below the average of past recessions.

NAAIM Managers Sentiment
I introduced this relatively new sentiment survey back at the start of the year. So far, it has proven to be a very good contrary indicator, rising and falling to reach extremes at major inflection points. It can theoretically fluctuate between -200% (very short) and +200% (very long).

The most recent results show on average an exposure of +82%. The last time we saw the NAAIM sentiment higher was on January 2nd, 2008 (83.55%) and before that, mid October 2007 (86.93%). But I’m sure by now, that’s not surprising to you at all.

Bloomberg Professional Global Confidence
The Bloomberg Professional Global Confidence Index was 58.88 for December. That is down slightly from November’s 60.3 but since it is still above 50 (for a 5th consecutive month) it means that we are still seeing more optimists than pessimists.

NAHB/Wells Fargo Housing Market Index
The Housing Market Index fell to 16, reflecting a very weak housing market. While it is off its lows, the HMI is struggling where it was last on May 2009. Readings below 50 reflect a negative market sentiment and this is the 44th consecutive month below 50 (since April 2006):
NAHB housing sentiment index Dec 2009

Option Sentiment
The short term average of the (equity only) ISE sentiment index is right about where we last left it. This week we did see the daily fluctuations dip lower than they have in a while. The ISE daily sentiment fell to 135 on both Tuesday and Wednesday (Dec 15th and 16th). At best, we can say that sentiment is neutral, which isn’t all that helpful:
ISE sentiment 10 day moving average Dec 2009 updated

In contrast to the lukewarm ISE sentiment, other measures of mood in the options market, like the CBOE (equity only) put call ratio as well as the ROBO put/call ratio are showing an eye popping amount of speculative call buying. There is no question that right now, option traders are throwing caution to the wind and positioning themselves for a major rally. History as a guide tells us they will be sorely disappointed.

Wall St. Strategists
This week we had a rare and sharp move within the asset allocation decisions of Wall Street strategists. Suddenly, your average chiclet toothed strategist decided to move out of bonds and into equities, moving their exposure to the stock market up to 60.5%.

This isn’t even close to an extreme but rather near the long term average exposure to stocks. What is troublesome is that it is sudden and comes during a time of moribund prices. The normal pattern of behavior is for asset allocations to mirror the underlying asset prices, rising as they rise and falling as they fall. So such an uncharacteristic move deserves attention.

Corporate Insider Activity
Insider activity has once again turned decisively bearish. While this is not a perfectly tuned indicator, for the most part stocks have difficulty climbing higher when insiders are selling as much as they are now. The most recent data suggests that corporate insiders are selling with as much enthusiasm as late 2007. If you are bullish, you have to ask youself what you know that the average insider doesn’t. Or what they know that you don’t.