Despite price weakness last week, the composite sentiment picture is still in the neutral zone for the intermediate term. There are several sentiment cross-currents as PIK pointed out in another thread, some indicators extremely bullish while others remain neutral to even slightly bearish.
First is Jason Goepfert's (SentimenTrader.com) SPY-SPX liquidity premium (LP) indicator. Thursday, 10-6-05, the SPY-SPX LP had a one day reading of over 90% which helps the short term bullish sentiment picture, for the IT, this LP variant is still in the neutral zone. Normally, IT bottoms are forming when the LP is in the 20% to 25% zone or higher.
Next is what is becoming the widely followed ISEE sentiment index measuring the retail buy-to-open (BTO) call-put ratio of equity options traded on the ISE options exchange. The ISEE 5 day MA is currently in the 172 area, not a level where important bottoms have occurred in the past. This indicator reflected strong signs of bottom fishing last week.
The OEX-VXO options volume-volatility power indicator, measuring the daily total OEX options volume and VXO against their respective 50 day MAs, has not reached the +150 buy zone as yet, but is on the bullish side of neutral (neutral is 100).
However, the QQQQ-QQV options power indicator has remained near or in its buy zone (over 130) for several days and is exhibiting a bullish triple pump. Typically, the power signals work the best when the OEX-VXO, Q4-QQV, and SPX-VIX (not shown) are providing buy/sell signals in unison. Currently, only the Q4-QQV variant is saying "bottom is near".
Next is a ratio composite of the OEX PC ratio and the equity options PC ratio. Past behavior of the OEX options traders suggest, as a whole, the group is not to be faded, where as the equity options PC ratios is usually a contrarian tool. Therefore, when this "ratio of OEX-equity option PC ratios" is in the 1.50 or below range, it suggests the OEX traders are more bullish on future stock prices than the equity options traders.
This indicator is at its lowest level since May 2005, is heading in the right direction for the bullish case, but I would like to see it dip below 1.50. The OEX put-call open interest (OI) ratio has been favorably improving over the past several days, which is another plus for the bullish case, but again, the OI PC ratio (not shown) has a ways to go before one declare it is solidly in the bull camp.
Here is the all-exchange call-put ratio measuring the action of both equity and index option trading on all six exchanges, not just the CBOE. This indicator is closing in on the 1.25 level where nice IT bottoms have been formed when the curve is below 1.25. Neutral to mildly bullish now.
Chuck (PIK) mentioned in another thread, an indicator dubbed ROBO (retail-only-buy-to-open) by Jason Goepfert. This indicator looks at the BTO call-put activity of the smallest equity options traders (1 to 10 contracts per transaction). The idea behind this tool, is it measures the mood of the smallest and usually least sophisticated options players.
This weekly data is provided by the OCC, and currently the indicator is showing a fairly high level of optimism. What is particularly bothersome for the bullish case is the call-put ratio actually rose last week among this group, a clear sign of bottom fishing. I would grade this behavior as mildly bearish for the IT.
Next is the weekly OCC data for the smallest equity option traders (1 to 10 contracts) BTO $ weighted call-put ratio. The OCC provides the total premiums paid for the BTO call and put volume, and this indicator multiplies the call and put BTO volume by their corresponding premiums, then the ratio is derived.
The small trader $ weighted BTO call-put ratio remains at levels not typically coinciding with solid IT bottoms. The downside to using the premiums paid for BTO purchases, is the question of are the contracts in the money, at the money, or out of the money. The OCC does not provide that detailed of breakdown, but nonetheless, when the indicator has been at these levels in the past, these traders are usually not rewarded with massive profits.
The below chart compares the weekly small trader BTO call activity and the sell-to-open (STO) call activity. When this indicator is in its lower range, it suggests the small equity options traders are cautious in purchasing call options and more confident in selling (writing) call options since they are not looking for higher prices, thus are not concerned their stock will be called and will pocket the premiums.
When the small traders are more optimistic about future price appreciation, this ratio will increase. Currently, this indicator is at extremely high levels suggesting the small traders are adverse to writing calls and are betting heavily on higher prices by purchasing BTO calls. Typically, downside price action follows this level of optimism.
The total retail customer (all transaction sizes) weekly OCC BTO call-put ratio at least declines last week, but is still above its 20 week MA. Normally IT price bottoms coincide with this indicator below its 20 week MA and close to, or on its lower band.
The daily CBOE and all other option exchange equity put-call ratios are also currently in their respective neutral zones. The daily OCC data for some reason includes the QQQQ options volume in their equity options numbers, so the put-call ratios in this chart have the Q4 volume backed out, providing a better look at actual equity options activity. The CBOE reported equity option volume no longer includes the Q4 volume, thus data pulled from the CBOE website has already been "cleansed".
A quick look at the Rydex asset flows. Next chart is bull fund-bear fund share ratio for the four largest bull-bear Rydex fund pairs. This indicator includes the Velocity-Venture, Titan-Tempest, Nova-Ursa, and OTC-Arktos funds, and the asset moves in many of those funds are becoming more dominated by large traders that are often right on price moves in the short term. However, it still cannot be denied this indicator is at historically low levels, and is ranked as bullish.
Last (finally) is the percentage of assets in the Rydex "newer" bear funds versus the total assets in the Rydex "cap" funds introduced in February 2004. The funds include small/mid/large cap growth/value funds as well as a Dow long and short fund. The group includes bear small cap and mid cap funds as well.
This indicator is rising and is at the same level as the late August and late September short term price lows. Assuming this indicator's behavior remains consistent with past important IT price lows, it needs to reach the 40% zone to indicate rampant bearishness has become the mood of the day for these Rydex traders.
In summary, despite the encouraging divergences seen in many of the breadth/volume MCO indicators, the overall IT sentiment picture simply does not reflect the sufficient pessimism typically accompanying important price bottoms. I have a lot of company in the belief that a lower price low is in the cards, but there are quite a few sentiment tools pointing to that possibility.
Now, off to a short vacation for me, good trading to all.