Thursday, May 31, 2012

lots of bears

Here is a pair of charts which illustrate the extent of bearish sentiment prevailing in the market now.

The top chart shows the  weekly reading (blue line) and its five week moving average (red line) of the AAII investor sentiment survey. The numbers shown on the graph are the percentage of bears divided by the sum of the percentages of bears plus bulls (so neutral opinions are ignored). You can see that both numbers now are at levels last reached at the 2010 and 2011 low points.

The chart right above this post shows the 10 day moving average of the equity put-call ratio on the CBOE. At the May 21, 2012  low point this moving average had reached the high points last seen at the 2011 lows thus showing that the volume of put trading had risen to high levels relative to the volume of call trading. This in turn is an indication of unusually high levels of bearish sentiment.

That trader sentiment is so bearish is remarkable because the drop from the March-April highs in the Dow and the S&P has been less than half as big in percentage terms as the 2011 break. The modest size of this latest break is telling us that the market thinks it has already discounted the worst that is likely to happen in Europe, and in fact did this last year. But people are responding to the news from Europe in the papers today more that the action of the market itself. This is an example of traders "fighting the last war", not the one they currently face.

I think this bearish sentiment is telling us that a big rally is imminent and will probably take the averages to new bull market highs.


mike said...

Why ? what would be the catalyst ? overseas markets already have broken down , ours doesn't ?

Carl Futia said...

catalysts are always surprises, otherwise the market would already have priced them in. But even a return to normal levels of bearish sentiment from currently high levels would give the market a bullish boost.

dcatlowpj said...

one word, two syllables: QE

isitso said...

The unusual bearish sentiment reminds me of the also unusual levels in 2007, 2010 or 2011.

In fact,even if they precede longer rallies, this kind of readings happen when the market is trading in bear-market conditions.

Here is a chart of the 5 day ema of the total put/call ratio (last updated on May 12):

EP said...

imminent! you said and since 3 weeks

Market Owl said...


You have been calling for a rally for the last 2 weeks. On May 24, you said a big upmove was ahead. We are down 50 ES points from that call. At what point do you admit that you are wrong? Or do you never admit that you are wrong and take credit if we bounce much later.