Sentiment is Down But Not Out
Certain indicators are extreme, but not quite to the panic levels we saw at times over the past several years.
- The four-week average of net bullishness in the American Association of Individual Investors (AAII) has dropped to its 2nd-lowest level since its inception in 1986. The only other comparable time period was August-November 1990 as investors struggled with a looming recession and banking troubles.
- For two weeks straight, 0 out of 42 Fidelity Select mutual funds had out-performed the return on cash (90-day T-Bills) over the prior quarter. This has happened 10 other times since 1986, with the S&P 500 showing a positive 3-month forward return all 10 times by an average of +7.8%.
- The smallest of options traders, buying 10 options contracts or less at a time, have finally turned excessively bearish. Last week they spent 24% of their volume buying put options, the most since mid-August. It's not quite at a "panic" reading, though. We'd need to see them spend 25%-30% of their volume on puts to consider it that extreme.
- Other options gauges are showing similar levels of heightened uncertainty, with the 10-day average of the equity put/call ratio (via the CBOE) showing its 2nd-highest reading in history, behind only immediately after 9/11.
- Short sales by the public eclipsed short sales by specialists by nearly a 20-to-1 ratio as of earlier this month, a new all-time record. While this ratio has been in a secular uptrend due to the diminishing role of specialists and increased activity of 130/30 funds and their ilk, new records in the ratio have still been relatively effective at highlighting market extremes.
- Open interest in "smart money" OEX options has tilted heavily toward the call side. This has been a consistent predictor of future market strength.
- Corporate insiders continue to buy heavily. The InsiderScore and Insider Insights service are showing corporate insider buy/sell ratios near multi-year extremes.
My 2 cents is that many sentiment-related indicators are "extreme", but not quite to the panic levels we saw many times over the past several years, and significantly under the extremes seen during the prior bear market. And as far as I'm concerned, technically we're in a bear market, so I'm not too hip on buying aggressively on "kinda, sorta" sentiment extremes.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.