Market Sentiment: Eye-Poppingly Bearish

by: Babak March 23, 2008 | about stocks: QQQQ / SPY    

Babak

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We stared into the abyss and staring back at us was this week’s sentiment overview:

Investor’s Intelligence
I mentioned in last week’s sentiment overview the surprising bearishness of newsletter writers as measured by Chartcraft. This week they have outdone themselves with an eye popping 44.7% bearish level.

To find this sentiment equally or more pessimistic, we’d have to go all the way back… are you ready?... to 1998.

Which, if you are old enough to remember (or agile enough to look up) was a time of unprecedented market turmoil brought on by a gaggle of PhD’s from Chicago running a little hedge fund called Long Term Capital Management. Back then, the II bears reached 50%.

Hulbert Newsletters Sentiment
According to Mark Hulbert, the stock market newsletters with the best long term track record are much more bullish compared to those with a track record worse than buy and hold. They, in turn, are suggesting being short this market. So which side do you want to be on? Of course, a track record doesn’t guarantee anything except experience. But considering the dearth of other measures which point to a bottoming process, it isn’t too hard to see this as another corroborating indicator.

Optionland
The CBOE equity only put call ratio has backed off its spike high, reached earlier this month. This is normal behavior for this indicator as the market now tries to pull itself up by the britches.

The ISE Sentiment index, on the other hand, never really reached extreme levels during last week’s close call with the January bottom. To be honest, I had been watching it in case it did, because that would have signaled that the retain option traders were giving up any hope of a bounce off those levels.

Magazine Cover
Here is the current Economist magazine cover:

Although it is decidedly negative, I don’t think it reflects anything more than what is really going on on Wall St. right now.

Subdued VIX
Although volatility, as defined by price movement in either direction, has been truly volatile, the VIX has refused to pierce 36 as it has in the past instances of market declines.

Part of me would like to see the VIX spike to crazy levels but I also have to remind myself that not all market bottoms are alike. As they say, the past rhymes, it doesn’t repeat.

So while it would be nice to have this yet another indicator among the myriad we already have, it isn’t really necessary. And perhaps there are structural reasons for this, that will persist even after this current turmoil.

Repo Market Failures
There was such a mad dash for safety that the repo market seized up after record failures to deliver collateral - US government treasuries. Rates also scraped the bottom of the barrel at 0.38%! And I thought the rates a few days ago at 0.92% were low.

I mentioned that the Fed is still way behind the curve (even after the recent rate cut). This is illustrated by the gap between the 3 month Treasury Bill and the Fed Funds rate. As well, so far this year, the general collateral rate (rate for borrowing/lending US Treasuries) has been on averaged 63 basis points lower than the Fed’s overnight target rate. That is in comparison to only 8 basis points in past decade.

See my point now? There is no doubt that the Fed has exacerbated this situation by refusing to get ahead of the repo/bond market.

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This article has 11 comments:

  •  
    Mar 23 07:47 AM
    It means an intermediate term bottom, trading bottom, and yes it is troubling that the VIX continues to stay low. Too much complacency. One year from now, stocks can't be higher, corporate earnings will continue to fall, as we enter a recession. Go to the malls- no one is shopping. Remember the consumer, 70% + of the GDP (which in itself is a national disgrace).
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  •  
    Mar 23 09:14 AM
    Sorry, I don't get the part about repo market. If there's a mad dash to safety and record failure of delivering treasury as collateral, then everybody would hold on to cash and repo rate should be much higher. Conversely, if repo rate is very low, it just means there's not so much demand for cash/financing. And if the overnight repo rate is much lower than the overnight fed fund rate, that says to me that there's plenty of supply of financing in the market, re-asserting the notion of the fed being the lender of last resort.

    What am I missing? Any enlightenment would be appreciated!
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  •  
    Mar 23 10:20 AM
    Too much complacency? What are you smoking! A dozen independent sentiment indicators are at extreme bearish levels. Newspapers are only about doom and gloom. As for 'entering a recession', we are already there. Yes, emerging markets have to fall, and they will... But markets predate recoveries by six months-- I'm selling my puts and climbing aboard, next stop 1600.
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  •  
    Mar 23 10:53 AM
    Your POINT is?? There is bearish sentiment..but not overwhelmingly so?? Though it is looking back at us from the abyss...prominent magazine covers aren't indicative of an extreme bearishness? Is there possibly any investable idea straightforwardly presented in your article?? Nive picture, though.
    This is really another Alpha article (of which there have been far too many recently)...that is All Hat and No Cattle..as they say in Texas.
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  •  
    Mar 23 11:17 AM
    Interesting about sentiment. I went to the UTC (near UCSD) mall here in San Diego yesterday. Mall full. Apple shop packed. I didn't expect it. Maybe a holiday weekend anomaly.

    But I tell you this: In a real depression/recession, the malls are empty on the weekends. This is not nasty yet. So who knows ...
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  •  
    Mar 23 01:29 PM
    It is very frightening that there are many references to the 1987 crash, but seldom is there note that 1987 was also the first time the DJIA broke through 2,000. Yes, cub scouts, you read that right. The first time the DJIA broke through 2,000 was 1987, and the geometrically accelerating market since then is a clear sign that there is a rapidly decreasing correlation between market sentiment and reality. Until more investors are aware of the reality of the current market hysteria, there will be no intelligent discussion on the state of the market, and until there is intelligent discussion of the relationship between energy and the economy, there will be no awareness of what lies ahead. There are many discussions of alternative energy, but seldom is there awareness of the almost unimaginable scale of the current use of energy and the daunting task of refitting our global infrastructure. Let's start to prepare to scale down our vision of the future.
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  •  
    Mar 23 02:45 PM
    I also don't follow the point about the repo market. Any clarification would be appreciated.
    Reply | Link to Comment
  •  
    Mar 23 06:38 PM
    We continue to see W curves moving to lower lows. Until we see some sign of recovery and resolve with financials by the Fed, i.e. swallow the MBS pill, the threat of meaningful US asset class deflation still remains.
    Reply | Link to Comment
  •  
    Mar 23 09:14 PM
    I'm encouraged by the media hype (negativity) and the front magazine cover shown by the Enconomist.... must be just about bottom.
    Reply | Link to Comment
  •  
    Mar 23 11:03 PM
    I'm seeing a lot of bullishness and at least short-term bottom calling amongst various professionals lately, so am curious as to the level of bearishness reported here as it seems to contradict what I'm reading/hearing. I think this market goes up short-term but continues to be a bloody volatile mess as the hedgies short the institutions on every big rally and your average retail investor remains frozen in his tracks. Personally I'm looking to short the homebuilders off their recent double top if they can challenge it again and am looking for a reentry into gold (long) once it consolidates. Very short-term I'm looking to go long "safe" financials such as regional banks with clean books and solid loan portfolios. I also like the recent Visa IPO as a big cap, blue chip momentum play, also with an aura of safety given the absence of loan/debt exposure.
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  •  
    Mar 24 10:30 PM
    About to enter a recession? What planet are you referring to please. I have been shorting stuff for months, and the commercial R.E. biz is nearly moribund!
    Reply | Link to Comment
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