Sentiment Galore

Well you get another post, lots of moving parts in today’s market… Part of the reason you are getting so many posts, is that I have no position in the market. I have no edge here, and I am obviously digging deep in analysis to examine the most *likely* outcome.

Honestly the lists of divergences and poor breadth indicators are growing daily. Mole’s volume comment is not joke when one looks at cumulative NYSE and Nasdaq Adv- Dec volume. That being said, I am still waiting for some other indicators to diverge (another post another day)

FWIW I am seeing lots of talk of the AAII sentiment survey . It is one survey, and I recommend using more than one. AAII and TSP both stayed low while II, NAAIM, Consensus, and Market Vane all stayed high in 2007. There are many different types of surveys. As for put/call ratios, they are utterly mixed right now; yet, they are certainly divergent as I have shown earlier.

Today I am going to walk you through why reading headlines and looking at raw data can have caveats.

This is my sentiment survey index with multiple Bollinger bands. You will need to click the chart to enlarge it and see it more clearly.

Now remember how I got so bullish during the Japan incident? (a) bull market rules were in place (b) we were in the 3 stdev white (c) the rate of change (few charts below), was way in the red….

My point is that (1) we have divergence and (2) the momentum/ bollinger bands also say we have room for a little more bearishness. Now here is more…
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That index alone is great, but consider it 2 more ways to look at the same data, (1) absolute value (2) rate of change. Both are below and show that it’s prudent to be patient.

This is my sentiment survey index in raw terms. Notice how it is neutral.

Here is the rate of change in my sentiment index. This just goes to show that patience may pay off if one wants to catch a quick dip before the big flush….

Nothing exciting like the AAII would lead you to believe. Or in other words, just because one sentiment survey (that public generally follows) says “buy,” it does not mean jump in with both feet. In fact the AAII was very very divergent during the high of 07.

To wit:

Don’t get me wrong, this one sentiment survey is bullish in the shorter-term. The problem is that is one of like 15 indicators that I really follow. Who is to say we dont have a little bounce and flush like 07? Also notice how long investors can stay bearish… but more importantly… the lack of follow through (aka new bullish sentiment) also signifies a potential turning point.

As for other survey indicators (not in my index), they also do not suggest the world of investors are utterly bearish. The reason I dont use them in my index is a mathematical reason, I prefer %bulls/bears as opposed to a raw bullish % value. Same concept as puts vs. calls. I digress….

For due diligence, I will show you some other surveys.

Here is market vane:

it is not an actual survey just fyi, here is the definition (Thx mole)

The Market Vane Bullish Consensus is compiled daily by tracking the buy and sell recommendations of leading market advisors and CTA’s (Commodity Trading Advisers) relative to a particular market. The advice is collected by:

1. Reading a current copy of the market advisors’ market letter.
2. Calling hot-lines provided by advisors.
3. Contacting major brokerage houses to learn what the house analyst is recommending for the different markets.
4. Reading fax and e-mail sent from advisers.

and Consensus Inc.:

**** UPDATE as of FRIDAY MORNING*****

Many claim to study smart vs. dumb money. Many suggest that the OEX has smart money, and others, especially the NASDAQ, dumb money. Here is the OEX PUT/CALL RATIO. The OEX (S&P100) is supposed to have less retail trading, or that is at leas the theory.

Basically, if this has any credence (I am not sure), we should be cautious. I am skeptical of this indicator, but figured it would be prudent to let you know. Now what does this have to do with my sentiment data? Well, someone, an old timer, once told me, “when you see crap that looks odd or really strange don’t ignore it.” So I am not. Moreover, if for some reason the indicator is not “smart money” it is certainly odd. Why so many puts in the OEX (S&P100) and not the SPX?

I will also add, and leave you with, more on margin debt. Here is NYSE+FINRA (aka Nasdaq). I am adding this bc it also shows you that just bc a weekly index (one index) says people are bearish, think twice.

FYI I am leaving equities alone! I have no edge here. I have my little computer trading for me, but that intraday thing is irrelevant to a sentiment update.

Bottom Line: careful looking at one indicator. Also careful looking at one indicator in only one way. I for example thing less bullish sentiment and call buying on recent highs, in the context of record COT and Margin data, is a sign that the market is actually… WEAK. Or the longs that have been long, why would they be more bullish at higher prices, have the bears started to capitulate? I dont know, but keep in mind that we could be in a transition point- especially when you start looking at the breadth indicators.

Stay unbiased and enjoy your weekend rats, I am probably out tomorrow given the massive participation in the market today…

-Volar

ps for noobs if you want to see a hammer LNKD hehehehe
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