thought provocation for the week ahead…

Sentiment is a good measure when trying to assess where we are in the market and in attempting to guess the next move. Invariably, this data should be interpreted in a contrary manner, ie when everyone is long – be wary but particularly so on the downside – when everyone is downright bearish and fundamental value is apparent (as is the case now right throughout the market) then more often than not a bottom is in sight.

The following info passed my screens today and added weight to my own view that the market is due a rebound this week and quite possibly a sharp one.

With major markets having retreated by 5 – 10% in recent weeks now, sentiment is downright negativeand appears to be at the kind of bearish depths more consistent with major lows than highs. For example: 

1. The customer-only, equity-only, 10-day buy-to-open put/call volume ratio (a measure that I find particularly instructive from a contrary perspective) is at its highest level since Oct. 27, 2011, indicating option speculators are not that enthusiastic about stocks.

2. The American Association of Individual Investors (AAII) weekly survey indicates that only 25% of respondents are bullish, the lowest since Sept. 22, 2011 (see chart below).

3. Confirming the negative sentiment in the AAII survey, Investment Company Institute (ICI) reports that there have been 10 consecutive weeks of outflows from U.S. equity funds, totaling more than $29 billion.

4. The average strategist allocation to equities is only 52%, the lowest since 2009.

5. Short interest on all optionable stocks is at a new 2012 high.

6. Hedge funds, likely buyers on the recent dips, are still underweight equities, as evidenced by the fact that hedging activity in the options market is far from levels that suggest these funds are overweight equities. 

Nothing in the stock market is guaranteed (except if you over leverage yourself you WILL blow up!) but the sentiment and technical backdrops continue to favor the bulls, especially if we see an improvement in the European regional headlines to act as a short-covering catalyst. What’s looks probable to me is that if we don’t move up at least, that a major shakedown is not likely as I am wondering just who is left to sell?