ISEE Equities Alert

One of my readers mentioned the ISEE Equities last night and I decided to go and update my Excel chart for a more comprehensive review. In case you never heard about the ISEE here’s the skinny right from the source: The ISE Sentiment Index is a unique put/call value that only uses opening long customer transactions to calculate bullish/bearish market direction. Opening long transactions are thought to best represent market sentiment because investors often buy call and put options to express their actual market view of a particular stock. Market maker and firm trades, which are excluded, are not considered representative of true market sentiment due to their specialized nature. As such, the ISEE calculation method allows for a more accurate measure of true investor sentiment than traditional put/call ratios.

Okay, so let me try to loosely translate that into plain old English for you guys: The ISE Sentiment Index shows us what the retail schmucks are doing, thus anyone with a clue or more than a cursory understanding of the markets has been exempted from this data. That’s right, consider the Mole the veritable Babelfish of modern finance. Anyway, what’s important to understand is that the ISEE has been divided into  ‘Securities’, ‘Equities’, and ‘ETFs and Indices Only’. In the context of mapping the data to the SPX we are only interested in the equities column. And that’s the one I’m plotting in the two charts below. The third column may be helpful but they’re mixing ETFs in as well, so there goes the neighborhood.

It’s a big chart and you may want to click on it to zoom in. The bottom line here is that we closed at 94 yesterday and that a close below 100 does not happen very often and is usually accompanied by a meaningful low in equities. Basically the retail rats are running around screaming with their hair on fire and that may be a good time to scale out of your short positions.

Here’s the same data again but I slapped a 2.0 Bollinger on it just to be cute. For your convenience I have pointed out prior 2.0 BB breaches, which again are not very common. This now gives us two reason to be cautions – an ISEE equities reading of 94 plus a push outside the 2.0 BB.

But wait – there is more! If you call right now we’ll also throw in a brand new BB breach on the VIX! Some of you volatility connoisseurs may recall that this represents step 1 into a VIX buy signal. Step 2 requires a close back inside and step 3 confirms the VIX buy signal via a close below the second day’s close. Once all three steps are in place you usually see a meaningful reversal within a week.

Does that mean a bounce is all but guaranteed? Of course not, but we are not in the gambling game – as traders we are in the probability game. I don’t care if we drop another 100 SPX handles this week (well, maybe a little) – as the old saying goes: It’s better to be wishing being in a trade than wishing to be out.

Consider yourself briefed.

Cheers,