Some Charts to Help Gauge Sentiment

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This chart I often show which is the equity put/call ratio with 21 and 34 day averages. It is used as a contrarian indicator. When the ratio reaches extreme highs or lows, that can be helpful in timing market turns. But looking at the intermediate averages helps to see the longer ebb and flow of fear in the options market. Despite the senior indexes being only marginally off highs, the averages have started to trend up for the last month indicating a shift in sentiment that often accompanies a market downtrend.

This chart is from Sentimentrader.com and is a very interesting look at some of the Rydex fund data that they track. This particular study looks for times when the level of buying or selling in Rydex funds is disproportional to the price movement in the market. When there is lots of buying/inflow while the market does not really makes substantial gains (or even declines) that shows that the Rydex traders are buying the dips or are overly enthusiastic about further gains. During the rally since March when several readings like that show up in a cluster or narrow price range, it has often been at short term tops. We are seeing this again over the last 2 weeks.

This chart is also from Sentimentrader.com. It is what they call the Options Speculation Index and is a broad measure of bullish and bearish bets in the option market. It is used as a contrary indicator and excessive call activity often happens near market highs (and vice versa). This ratio looks at the ratio of calls bought to open and puts sold to open divided by puts bought to open and calls sold to open. The ratio jumped to multi year highs last week, which indicates that the options market is leveraged excessively toward the call side.

This chart is the OEX put/call ratio for 2009 so far. Unlike most put/call ratios I mention this one is a smart money indicator typically as smart traders buy puts as hedges when the market has gotten ahead of itself. In the past there have tended to be several spikes up in this ratio as a significant top approaches. The ratio spiked up on Friday again to 2.04. The intermediate averages of this ratio are also showing this group to be maintaining consistently high put exposure (on a relative basis) consistent with expectations of significant downside risk in the markets.

Another thing of note on the sentiment front is that one of the lowest bearish % readings in the Investors Intelligence survey occurred this week. This is a contrary indicator typically but is best used to time the market with the larger trend. So the question is whether we are still in a longer term bear market in which case I would find this very significant. The 200 day moving average (which is a simple way to gauge long term trend) is pointed up now though. But with several other signs of longer term excess bullish equity speculation, I think it is notable. Also the survey showed a relatively high percentage of advisers expecting a correction. Despite the contrary use of this survey, this particular aspect of the survey has in the past functioned more as a confirming indicator and there often is some pullback when there is a high percentage expecting a correction.

Most of the above measures are more significant over the time frame of a few months rather than a few days. On a short-term time frame there is some mixed data. The VIX spiked up Friday and may be slightly bullish short-term. Also there was a very low cumulative TICK reading on the Nasdaq Friday, which should be bullish as well. But most other short-term sentiment gauges are neutral.

From a charting perspective, the close below 1100 on the S&P made a third failed breakout attempt above the Oct highs. This tends to be a good reversal price pattern. But any move above the recent highs is likely to succeed in a breakout. I maintain the view that the market is in a topping process which may be complete with this most recent failed breakout on the S&P. Tops tend to be slow in the forming and take persistence to establish a successful low risk-high reward position anticipating a new downtrend.