Freshly squeezed market commentary & analysis
Doug Kass wrote today that Fear Makes a Comeback (by the way, you’ll find interesting links like that regularly over at news.tradersnarrative.com instead of in the regular stream of posts here). Doug points to the recent Robert Prechter interview in the New York Times. But I’m not so sure
We already looked at the previous week’s smorgasbord of sentiment data on Friday. Sure, there was a bit of give back as the market fell. Obviously the rise out of the lows at the end of June was being counted on my many to be the real deal (including this intrepid pajama wearing blogger). But we can’t really say definitively that there was fear out there. Not in any of the sentiment surveys and certainly not in the options market.
Last Friday, I didn’t show a chart of the options trader’s positions, so let’s go over them here. Since the hard right edge of the chart is difficult to see if I show too much data, I’ve zoomed in to only shown the ISE Sentiment equity only with its 10 day moving average from January 2009 to today:
The solid line represents the 10 day moving average which has been slowly rising since bottoming in mid June. As the chart shows, there is a decisive lack of fear. In fact, we can see a cluster of daily ISEE Sentiment index values around 200 - implying that option traders are sometimes buying twice as many calls as puts.
If burrow further into the data and look at the intra-day pattern, we see even more bullishness. For example, this morning, when the markets gapped up and ran back up to kiss the 1040 head and shoulder neckline, the ISE Sentiment index was 281. This means that we had almost 3 times as many calls being bought than puts! Then as the market weakened, the ratio fell to 268 and then lower still. But the daily value was 186, for a positive but very weak close. The same complacent picture emerges when we look at the traditional put call data from the CBOE:
Since this is a put call ratio, instead of a call put ratio like the ISE data, it is the mirror opposite. Usually, for a lasting bottom we see at least a short term spike to 1:1 put call buying. But please note, this happens usually. During the previous bear market, the options market threw us a huge curveball: Crazy Options Market and even right at the March 2009 low: Option Traders Wildly Bullish. This is a conundrum that hasn’t been really resolved although more than a few valiant analysts have tried.
In any case, we can’t really say that there is ‘fear out there’ based on the options data. And based on other data there is outright bullishness. According to a recent research note put out by TrimTabs, retail traders who try to time the market using leveraged ETFs are actually betting on a market rally. Mark Hulbert wrote today:
According to TrimTabs estimates, which cover the week through last Thursday’s close, investors poured $434 million of new money into those ETFs that provide 3-to-1 leverage on the long side of the U.S. equity market, while pulling $355 million out of ETFs that provide 3-to-1 leverage on the short side.
TrimTabs also provides the caveat that this contrarian indicator has a very short term predictive quality. Any signals, like this one, usually are valid for a week, after which they start to degrade. So this is yet another piece of the puzzle that suggests to me that we are going to see short term weakness continue but eventually an intermediate low is coming up. I already mentioned that when breadth is this bad, it usually gets worse, before it gets better. And today, Wayne shared with us his PTA model which offers a similar scenario.
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The fear is the shorts worried about a Bernanke Sunday night, early Monday morning multi-trillion QE announcement
The title of Kass’ piece was kind of a misnomer. while saying fear is back, he pooh-poohs it. In fact, he claims we have already made the low for the year. Not sure he is right.
ISEE complete figures are somewhat different and fear is priced in
ISEE ISEE 88 7/6/2010 10-Day Moving Average 100 6/22/2010-7/6/2010 20-Day Moving Average 97 6/8/2010-7/6/2010 50-Day Moving Average 98 4/26/2010-7/6/2010 52-Week High 185 4/15/2010 52-Week Low 59 5/7/2010
Hi Babak, Thanks for your analysis. It confirms also the conclusions I have drawn here
The percent bullish indices also show no fear. Barely average to slightly bullish sentiment.
This happens after two months of continuous decline, and follow historical high bullishness, as shown by the historically low Put/Call ratio reading in late April
Pej, thanks for the links, interesting analysis. The only thing that is jumping out at me right now is that the Rydex traders are actually heavily leaning bearish with a massive lopsided ratio between the Ursa/Nova funds. The sentiment cross currents are very confusing right now to say the least.
I’m not really familiar with the Rydex traders, but one way to play this would be to go long those Ursa/Nova funds?
Also, quote from David Rosenberg’s today’s letter:
He and the other guest talked about the "fear in the market," but there is hardly fear; concern perhaps. When analysts are still raising their estimates and almost all strategists are still recommending at least market-weight equity allocations (those cutting their targets for the S&P 500, as we saw today from a big bank, still see 15% upside through to year-end) and economists are trimming their GDP forecasts to 2.6% (for true "fear", call us when they out a minus sign in front of that number as was the case in the opening months of 2009) there is no capitulation at hand at all, even though that is what the bulls would desperately like to see since their "cheap" valuation arguments don't seem to be having much impact. Besides, since when is valuation ever a good timing device? As one example, a lead article on Bloomberg today reads Double Dip is Unlikely, Credit Suisse Private Says "¦ and the first sentence reads: "Expectations for a "?double dip' recession are over pessimistic "¦" When we brought this up to Larry, his response was that it seemed from the "market chatter" that there was lots of fear in the air.
Sorry for all the noise I’m generating by putting in so many comments…
Here’s the latest from Goldman (via zero hedge): http://www.zerohedge.com/article/goldman-tells-clients-ignore-controversial-bad-news-sees-16-precisely-recession-chance
The best news first: the model shows essentially zero probability that the economy is currently in recession. Payrolls have generally been expanding in recent months and the unemployment rate has actually come down slightly. This is unlikely to be a controversial conclusion for most market participants and so we will not dwell on it further.
More surprisingly, the model also shows a very low probability (1.6%) that the economy will be in recession six months from now.
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