Bizzaro Sentiments

When it comes to consensus, the obviously smart thing to do is try to be a step ahead of it. There are times when it is feasible to guess what the herd is doing and take a contrarian stance, albeit with a bit of practice and experience. There are times when it is not.

Let us look at some of the main sentiment indicators:

• AAII Investor Sentiment Survey: This is at a record high with 63.3% bulls. You have to go back all the way to 2004 to see a bullish percent greater than the current reading. So for 2010, we are in unchartered territories. But it is possible for markets to continue going higher in spite of multiple recent readings of above 50%. Here are my two big reasons:
  • Judging by the studies and mutual fund inflows, the number of retail investors appears to have substantially decreased in 2009 and 2010. So it is quite possible that this indicator may have lost some of its predictive value.
  • Even if this indicator was considered a solid means to show where the market sentiment largely lies, it won’t necessarily signal a top. Remember the crowd is wrong at the change of a trend. It is usually right in the middle of a trend. Is the trend changing?
• Investors Intelligence Bull/Bear Consensus: This is where about 140 financial newsletter writers give their feedback on where the market is heading. This too is standing at a record high over 55. Between the AAII survey and this one, I give more credence to the Investors Intelligence survey in order to follow a contrarian strategy. This is clearly nearing its top in terms of bullish sentiment. Slightly concerning.
• CBOE Equity Put/Call Ratio: Getting close to its lows of the year sitting at 0.53. Many folks are pointing out this low value and signaling another reason why the top is here. However, the indicator is nowhere near how low it can go before signaling a possible top. Case in point – 2010 has seen this ratio dip below 0.4 in mid-April for a brief time. In other words, should the momentum continue, the ratio can continue to dip further.

There are several other indicators like the FC Market Sentiment, Market Vane consensus, Consensus Index, The Total Equity Put/call, ISEE sentiment index, etc. I will spare you the details because they are telling more of the same (i.e., most of them are nearing their extremes). Of course we all know and sometimes painfully so, that these indicators can remain in extreme conditions for longer time than you and I can remain solvent. While the top cannot be called solely based on the current status of these indicators, the fact that many of them are near the end of their ranges, should be paid heed to, especially for an intermediate to long term trader. For short term trading, the equation looks different as in – keep backing the truck!

Current Positions

I am still long the market but with some selective hedges. Most of the below positions are not new compared to the last time I posted them on the blog. You can follow me on twitter where I post close to real time trades.

Long – Q, NFLX, NTAP, CREE, AKAM

Short – WFR, ALY, TINY

StocksRider