Sentiment Review: Bullishness Rising

by: Frederic Ruffy August 17, 2008 | about stocks: DIA / IVV / QQQQ / SPY    

Frederic Ruffy

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The CBOE Volatility Index [.VIX] fell 0.76 to 19.58 Friday and closed below 20 for the first time since June 5. The market's "fear gauge" is now well below its mid-July highs above 30 percent. The decline in the VIX reflects the recent trend of falling risk perceptions and diminishing bearishness seen in the US equity market during the past month or so.

Other indicators confirm that bearishness is easing. Monday, the Nasdaq OMX Group (NDAQ) reported that short interest on the NASDAQ fell to10.76 billion shares in 3,164 Nasdaq securities at the end of July 31, which compares to 11.18 billion shares in 3,143 securities at the end of July 15.

Fund investors seem a bit more optimistic. Over the past three weeks, equity funds have seen net inflows of $11.3 billion, according to AMG Data.

In the options market, the bullish trading is being seen in a number of indicators. For example, the ISE Sentiment Index [ISEE], which tracks call buying divided by put purchases on the International Securities Exchange [ISE], hit 123 Friday. It indicates that call buying outpaced put buying by 23 percent Friday. Moreover, the ten-day average is now 113 and at one-month highs.

Meanwhile, the total put to call ratio (for trading across all US options exchanges) has been falling. Friday, for example, approximately 7.7 million calls and 6.4 million puts traded on the day. The ratio fell to .83. While that number was probably distorted somewhat due to the options expiration, the ten-day average is now .84. The chart below shows the 10-day average over recent years, and the extreme low of .77 set on May 19 that corresponded with the last peak in the S&P 500 Index [.SPX].

click to enlarge

Figure 1: Total Put To Call Ratio (10-day Average)

Yet, while bullishness is back to levels not seen in more than a month, by other measures, it is probably too early to say that it has risen to a market-topping extreme. For example, the sentiment surveys are still mixed. Investors Intelligence reports that 31.8 percent are bullish and 45.5 percent bearish, which compares to 34 percent bullish and 43.6 percent bearish the week before. The American Association of Individual Investors [AAII] says bullish sentiment rose to 42.86 percent from 35.61 the week before. Bearishness fell to 38.96 percent from 42.42 percent.

So, taken together, the sentiment indicators continue to suggest that bullishness is rising after extreme pessimism and negativity forged a foundation for a market bottom in mid July. From a contrary view, the trend bodes well for higher stock prices because, as anxiety levels ease, more capital will flow to the equity markets and the trend can feed on itself--that is, until sentiment reaches the opposite extreme of bullishness, euphoria, and greed.

Disclosure: None

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This article has 15 comments:

  •  
    Aug 17 05:19 PM
    For the capital to flow into the market,this capital must be made somewhere,as average american investor sits on losses of 40% and bigger,where tha capital will come from.Better write tales for children as you are too uneducated to comment on investing,honcho.
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  •  
    Aug 17 05:57 PM
    Any coincidence between the VIX under 20 and the light volume that always marks August? I read in the New York Times that many people take these things called "vacations" during this period. I wonder if that may have an effect on the sideways nature of trading patterns in the last two weeks? Anyone got one of those Magic 8-Balls they could shake for an answer? Make sure the article contains a minimum of 100 words. Thanks in advance!
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  •  
    Aug 17 06:51 PM
    Responding to 'User 244491' who is obviously widely read and well educated (the hints are in his fine command of grammar, spelling and prose), new capital inflows into markets originate from a variety of sources. One only has to look at the decline in the gold and commodities markets to recognize one possible source. Rather than mock the authors' investigative interpretations, which appear on target, I would suggest you dig up some childrens' level economics books, which you seem to be all to familiar with.
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  •  
    Aug 17 07:53 PM
    Mr.Lathrop is right...just look at the volume...
    Reply | Link to Comment
  •  
    Aug 17 07:56 PM
    Reader----you were very rough on "user" but he deserved it and you are right. There is a huge amount of money in money funds also. The most in years.
    Reply | Link to Comment
  •  
    Aug 17 09:57 PM
    Casual - please don't criticize one's use of grammar and spelling with the following sentence:

    I would suggest you dig up some childrens' level economics books, which you seem to be all to familiar with.

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  •  
    Aug 18 04:00 AM
    I expected criticism for my bearish view on the market,thanks,sorry for my english (I live in Frankfurt,Germany) but I know that there is no new money on the table.Some say money come from commodities back to stocks,I disagree,as average american investor sits on losses above 20% on those too as many of you like to buy things at the top.
    Regarding money is flowing from money market into stocks,I disagree too,as money that is invested in fixed income usually stays conservative,investors that go for low interest are smart investors,they know market is broken they will wait at some extreme valuations before buying beaten bleeding stocks,as I expect Dow Jones to reach first bottom at 7000-7500 next year for sure,probably some short term money will be reinvested from bonds to stocks but only short term,as we enter biggest crash in american history (thank God Federal Reserve is buying index futures,selling short commodities to stop panic) that will get us to 2500-3750 on the Dow Jones.But even then nobody will make any money buying big caps as indexes will stay flat for 115 years with very small yearly change.After we will have gray hairs our children and grand children will ride next big bull wave,but we will never see a bull again.
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  •  
    Aug 18 04:02 AM
    I meant 10-15 years,not 115.
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  •  
    Aug 18 09:12 AM
    Thanks for the feedback. As has been pointed out by others, capital from many sources including a shift out of commodities or bonds. Also, according to the latest data from the Investment Company Instititute, there is more than $3 trillion sitting in money market funds. Private equity funds and mergers are another source.

    As for VIX below 20 because of the holidays, maybe. But, it is also interesting to note that it was hitting multi year highs of 37.5 exactly one year ago Friday.
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  •  
    Aug 18 10:34 AM
    There is a bear case to be made, but User's logic is today's amusement!
    I expect the action to start in the fall, as is typical. Seasonally speaking, the summer doldrums max out in Aug. Takes big news to get the key players back from vacation. They'll be back when school starts.
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  •  
    Aug 18 03:21 PM
    Jimmy - absolutely yes, there is a correlation - the better, less emotional traders are on vacation, and the "kids" are left to run the place - this tends to lead to exaggerated moves both ways. But keep the 8 Ball handy anyway. ;-)
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  •  
    Aug 18 03:25 PM
    User 24491: I like the sound of your conviction in your writing, and would like to know the underlying basis of your conclusions if you feel that the dow will head that far south. (other than that you may be short already.)

    There may be several data points available to support such an opinion of an extreme downturn, but in the interest of sharing your knowledge, would you be willing to publish how you have arrived at your conclusions?
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  •  
    Aug 18 05:48 PM
    End of 2002, SP 500 was about 880. What happened since then that justifies current levels; credit expansion, huge profits for banks and inflation under control thanks to China. Now, bank profits are gone, credit is frozen and we import inflation from China. Of course, this has to be refined on a sector basis since some industries created real value during these past years but altogether it seems to me that the market is still very high.
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  •  
    Aug 18 06:50 PM
    2houndz-
    Thank you for pointing out my flawed sentence. But, do you have anything of value to add to the topic of this discussion?
    Reply | Link to Comment
  •  
    Aug 20 01:03 AM
    Seems to me his comment was right in line with yours. Those who live in glass houses shouldn't throw stones.
    Reply | Link to Comment
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