"A Change in Sentiment"
By Helene Meisler
RealMoney.com Contributor
11/8/2010 7:00 AM EST
"Did last week finally change sentiment?
I noted on Friday the International Securities Exchange's equity call/put ratio had exploded with only two hours left to go in the trading day. It had not been that high since mid-April, and dating back to 2006 it hadn't been that high either. But as is the case so often these days, it pulled back and didn't close there. It closed relatively high at 251% but there is nothing in that reading that says "Wow" the way the 300%+ reading earlier in the day did. That's a pretty standard reading in an up market.
Still, there was a change in sentiment late last week. The Chicago Board Option Exchange's total put/call ratio dipped under 70% for the first time since April 26. Before you run out and short everything, let's take a look at this reading closely.
First, it took about one month after the February low for us to get our first sub-70% reading in the put/call ratio. These low readings are not terribly common though. We had one on March 9 and then didn't have another one until April 12; we had another on April 14.
Here is a chart of the S&P 500 with the dates noted. The black arrow is March 9. You can see this low put/call ratio meant very little, but as I noted we were only one month and 10% into the rally then. The red box represents the two readings in mid-April which gave us the Goldman Sachs (GS - commentary - Trade Now) and Securities and Exchange Commission decline that lasted all of one day. Finally, the red arrow represents April 26 which we now know was the high of the rally.
Thus far there has been very little selling in this market. We've had a few one- or two-day declines but in general there has been no selling pressure on those days. However, my point today is that for the first time in nine weeks and after an 18% rally we finally saw our first change in sentiment with this sub-70% reading in the put/call ratio. And that leads me to believe this week's Investors Intelligence readings will finally show 50% bulls.
To put the Investors Intelligence bulls into context in terms of the spring rally, we first achieved a 50% reading on April 14. It remained over 50% for the subsequent four weeks, right until the May "crashette." So it took more than two months to get to 50% bulls then as well since we made the low on Feb. 5 and didn't achieve 50% until mid-April.
There is a big difference between the spring and now, well, perhaps two big differences. The first is that in the spring the Federal Reserve was finishing its first round of quantitative easing and now it's just embarking on its second round. The second comes as the year-end looms and year-ends have a funny way of taking on a life of their own these days.
However, I think it's worth noting that we have seen the first big shift in sentiment since this rally began. And maybe Wednesday we'll see the next big shift with the Investors Intelligence bulls over 50%. "
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Enviado: 9/11/2010 3:37