Institutional Sentiment & Analysis Weekly 09/03/06
Published Sunday 9/03/2006
By Mark Young of Equity Guardian Group

Short-Term Sentiment:
Mixed-to-positive.

Overall Intermediate-Term Sentiment: Positive.

Individual Investor Sentiment: Positive

Small Speculator Sentiment: Positive

Hedge Fund/Small Manager Sentiment: Positive

Longer-term Trend:
Positive.

Intermediate-term Trend:
Positive.

Short-term (one-day) Signal:
None. We'll look long, but with care.

We are trading these signals intra-day with KTT subscribers on Yahoo IM--contact us for details.

Ideal ETF Portfolio (tracking portfolio):

25% SPY at 125.20
and
25% QQQQ at 36.70 or better.

We're looking to add back on a pullback, but we could go flat on a large spike.

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Results of the Wall Street Sentiment Survey (formerly known as the Fearless Forecaster Sentiment) taken after the close on 8/24/06

Response was to this question: "At the end of next week will the S & P 500 close up (bull), down (bear), or unchanged/no opinion (neutral)?"

Weekly BULLS:  21%
Weekly BEARS: 58%

Our `Smart Money' Pollees are  0% Bullish and 67% Bearish.

Our Amateur Trader Pollees are 0% Bullish and 100% Bearish.

The Senticator is Neutral.

Last time, I was looking for slop on Monday and a big rally on Tuesday and Wednesday and then chop into Friday. The market was UP on Monday, slopped and chopped on Tuesday, slopped on Wednesday and Thursday, and rallied on Friday. Predicting slop isn't exactly valuable, and a good thing, too. We got the direction and character of the market correct, so even though we didn't nail every wiggle, I think folks should have done well anyway following that road map. I think we can take a B- for that call.

The Mechanical model went long at 129.65. The Subjective Model did too. We exited all at 131.42 for a nice profit on a full position.

Proprietary Surveys
This week, the WSS Surveyees are again rather Bearish, and again the "Smart Money" guys are too. Our survey of "amateur" (more emotional) traders is showing nothing but Bears. The Senticator is Neutral. Basically, we're seeing a ton of Bearishness in a rising market, with the Senticator hinting at the early stages of a top. We know from experience that the early stages of a top often entail the steep left hand side of the top. We also know that the Fearless Forecasters find top picking difficult to resist. I count myself among them. That said, I'm going to resist the urge. We simply have too much company. I would say that we have a prescription for one more run higher.

Message Board Sentiment
The message board sentiment poll still shows Bulls at 29% and Bears at 50%. This is technically Bearish, since these guys tend to be right more often than not, but whenever Bears get above 50% I'm on the lookout for a rally. Participation was about normal. The Actual Position Poll shows 24% at least partially long, and 56% at least partially short. There are now 32.35% fully short Bears. This is way above my 20% fully short threshold, which is Bullish and this is supported by the very large number of short Bears on normal participation in this poll. This is showing a ton of top-picking in a pretty solid market. Maybe they sell it down next week, but it sure looks like a lot of folks expect it. Check out www.traders-talk.com for early updates throughout the evening. Basically, the data remains supportive of higher prices so long as we have so many short Bears.

Our T-4 Turn Indicator is currently neutral and activity is rising.

Options Sentiment
Daily P/C ratio: 1.0. Neutral-to-Bullish
10-day P/C ratio: 1.03. Constructive.
Equity P/C ratio: 0.67. Neutral.
OEX PC ratio: 1.52. Neutral.
OEX 10-day PC ratio: 1.82. Sell warning. See charts below.
OEX $-weighted* P/C ratio: 0.55. Neutral.
QQQQ $-weighted* P/C ratio: 1.03. Neutral.
ISEE Sentiment Index:  69. Buy. This low reading may simply be unwinding the high reading the other day. I'm distrustful of this number. Recently, low readings have been very good Buy signals.

The data are interesting. It appears that some of the wild readings from the OEX P/C data and from the Q's have been unwound. I'm still very concerned about the 10-day OEX P/C ratio but it would surprise me if this turns out to be a hook. There are a lot of folks leaning short right now. The OEX 10-day has been very good in the past but it has not always been so.

Back in '97 and '98, this was a great fade. Only recently have high readings been a reliable Sell. This at least tells us that sometimes the market can just run. There's some deep seated pessimism hiding in the data and I suspect that some fund or funds are being lured into leaning too short.

The ISEE Sentiment Index indicator is contrarian; traditionally, over 200 is too optimistic, under 100 too pessimistic. I've loosened that a bit in recent months.
*$-weighted data courtesy of Hamzei Analytics. Readings over 2.0 are Bullish and near 0.5 are Bearish.

General Public Polls
Last week, AAII reported 41.57% (vs. 39.35%) Bulls and 25.84% (vs. 37.42%) Bears. We got a big drop in Bearishness and a big spike in the Bull/Bear ratio. That's a caution sign, but nothing like a Sell. We're coming out of 14 weeks in the Buy zone and that will probably support some more strength for a while. Investors Intelligence reported Bulls at 42.10% vs. 40.00%, and Bears at 33.7% vs. 34.7%. This is a modest increase in Bullishness and a drop in Bearishness, but again nothing excessive. Mike Burke and John Gray advise that this is well within the norm and is consistent with higher prices. LowRisk reported Monday night 16% Bullish vs. 26% Bullish the previous week, and 67% Bearish vs. 59% Bearish the previous week. Folks, this is incredible. I don't think we've seen much more Bearishness--especially in a decent market in an up trend. Unless it is in error (which is possible), this implies some higher prices. It also implies that there's a ton of deeply ingrained Bearishness amongst smaller investors. 

Rydex Sentiment
The Rydex Dynamic Bull funds had $11MM of outflows, while the Dynamic Bear Funds had outflows of $2MM. The overall fund shifts were mixed. There was $9.5MM in Bullish non-Dynamic asset shifts. The RSO showed a tiny Bullish asset shift on a nice rally. That's modestly Bullish for the market but I'd not read much into it. It STILL looks like we could use a spike above the highs (perhaps a good one) in order to get enough Bears to change teams and thus make a top of some sort. Note the rising wedge on the S&P. Normally, that's a bearish set up, but if they break it up, it's very Bullish, short term. Cumulative net Bear fund buys are not far off the levels of the June low, so we probably aren't anywhere near the ultimate top for this Bull move.

Conclusion
Friday morning, we said that normally, we'd expect an early, news related gap to be a fade but we figured that the powers that be would just run the market higher. They did pull it back just enough to generate some Bearish hope, but in the end they moved it higher. In looking at all the sectors Bearish as all get out, I'm really thinking that someone is leaning heavily short in the options and I'm thinking that this would be a great time to bag one or more funds who are doing the leaning. Remember, I've been worried about the 10-day OEX P/C ratio because it's saying "Sell" and it has recently been a great indicator. The charts above show that in Bull markets, sometimes that Sell signal is a great Buy signal. And let's not forget all those funds who are positioned for that "Nenner-Guy's" September sell-off. This would be the perfect instance to spike the market higher and then higher still. There is so much ingrained pessimism out there, and also tons of top-picking, too. There's no guarantee that we can't go down, but I think it's a very bad call to get short ahead of some technical confirmation. At this time of year, if they turn the trend and show us negative breadth, we'll want to short, but until then, let's let the crowd try to pick the top. My call is for a rally on Tuesday and Wednesday, and then a decline on Thursday and a bounce on Friday. Essentially, I think we'll close the week off the highs but also higher.

We don't have a ST Sentiment signal but there's some reason to look higher. Since we've been publishing our ST Sentiment Signals, we've had 29 trades and 22 winners. We're keeping losses small and have consistently nailed down winners quickly. If you are interested in our ST Sentiment Signals and would like to receive these day trades and instructions via both email and Yahoo Instant Messenger (with specific trade set ups, ongoing entry, stop, and exit points), please contact us with your yahoo ID. There is a $39.99/month surcharge for this service. 

The Mechanical model sit flat. The Subjective Model go long 1/2.

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Ideal ETF Portfolio (tracking portfolio):

25% SPY at 125.20
and
25% QQQQ at 36.70 or better.

We're looking to add back on a pullback, but we could go flat on a large spike.

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Past performance is no guarantee of future returns. All information included in this missive is derived from sources we believe to be reliable, but no guarantee can be made to that effect. None of the forgoing should be construed as an offer or solicitation to buy or sell any security. The publisher may have a long or short position in the funds or securities discussed at any given time. We aren't your advisor, unless you have a signed contract with us. Please review any trade that you do with your trusted advisor FIRST.

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Mark Young
Editor

See the link below for a historical chart of Fearless Forecaster sentiment.

ABOUT SENTIMENT AND ANALYSIS

The Fearless Forecaster Sentiment Poll is taken each Friday from a generally static pool of experienced technical analysts (both private and professional). The Fearless Forecaster Sentiment is not normally a good fade, though there are times when it can be.

The Fearless Forecaster sentiment data is useful on the short term; the Fearless Forecasters tend to be right. Typically they are right sooner rather than later, if there's a large plurality. On the flip side of the equation, if 90% or more are Bullish or Bearish, the odds of them being right over the very short term are huge, but the odds of a major turn (in the opposite direction) soon thereafter are also quite good.

We have also found that when the Fearless Forecasters are evenly split, look for a BIG move in either direction, but usually down.

Over the years, we have found a number of other tools to help in evaluating the Fearless Forecaster Sentiment. We publish this in our weekly "Institutional Sentiment & Analysis" (a part of our institutional research). These additional tools are our "Smart Money" poll, and our Senticator. Both are proprietary polls run by us.

We have found that the Senticator tends to be right by the end of the week (as much as 82.7% of the time), though it tends to be more accurate in a rising market than a falling one.

The "Smart Money" pollees are very useful when there is divergent opinion. It's generally NOT a good idea to fade the "Smart Money" unless "'EVERYONE'" (all sentiment measures) is in agreement. When in doubt about the meaning of the Fearless Forecaster Sentiment Poll, defer to the "Smart Money" poll. The "Smart Money" guys are folks with whom I've worked or whom I've watched for YEARS. They all have different approaches and they're all VERY good (not infallible, just good analysts/traders).

Subscriptions to Institutional Sentiment and Analysis are $99 per year. This also includes special sentiment updates and reports. Our polls are unique and insightful, and our analysis is some of the most accurate on the Street.

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