Value of Perfect Information

Back from vacation, where the weather was as volatile as the stock market, I was happy to see little damage to my DITM covered call strategy, made whole by today’s rally. Although the VIX came off the 4 handle down to 36, the CBOE equity put/call ratio zoomed up to 74 – good for the market (as we saw today). NYSE new highs to lows were an incredible 33 to 1,296; 23/947 on the OTC. Both newsletter surveys – Inv.Intell. and AAII remained inverted, with more Bears. Insider selling to buying was a lowly 3:1 ratio. Money actually went into MMFs for the first time in a month; monthly data on ETFs showed money coming out of equity and international funds -level in bonds. The 2010 support level on the SPX (S&P500) held at 1100 -now trying to break resistance at 1200.

AAII Investor Sentiment for the week ending March 16, 2011 showed a major reversal.  Those with a bullish view over the next six months fell to 28.5% from 36.0% last week.  Those with a bearish view over the next six months rose to 40.1% from 32.3%.  This was quite a change in sentiment.  Considering the limited down move in the SPX I would not say this is time to be a contrarian and go long as a result of the increased bearish sentiment.

The charts below have correlated very well since January 2010 and show a very wide divergence still.

AAII Investor Sentiment for the week ending March 9, 2011 showed little change over the prior report.  Those with a bullish outlook over the next six months fell to 36.0% versus 36.8% the prior week and below the historic level of 39.0%.  Those with a bearish outlook fell to 32.3% versus 33.1% in the prior week and above the historic level of 30.0%.  This report has correlated very well with the SPX and implies a move down in equities in the near term.  The question now becomes though is this yet another correlation that has broken down?

This week’s AAII sentiment survey is relatively unchanged.  Those with a bullish outlook over the next six months rose to 36.8% from 36.6% the prior week versus an historic reading of 39%. Those with a bearish outlook over the next six months dropped to 33.1% from 36.1% the prior week versus an historic reading of 30%.  The divergence between these readings and the SPX continues to stay very wide and signals pending SPX weakness.

WOW!  Check out the reversals in market sentiment over the past week.  The AAII report is through Tuesday so Libya would be “priced” in here.  Still, the moves are massive. Bullish sentiment dropped to 36.6% from 46.6%.  Bearish sentiment rose to 36.1% from 25.6%.   Buying the dip may be out of favor for a period of time as fear has really crept back into the market.

The SPX has correlated very well with the AAII data as shown below.  The divergence between the two is pretty large right now.  Time will tell if the red line or blue line is wrong.

This week’s AAII Investor Sentiment (asks of one’s market view over the next six months) is out and still in the bullish camp. Those answering bullish dropped 2.8% this week to a still above average 46.6%. Those answering bearish dropped 1.3% this week to a still below average of 25.6%.

The SPX continues to ignore prior correlations and the AAII sentiment data is yet another. The charts below speak for themselves as the divergence over the past few months continues to grow new levels.

The divergence continues yet again. The most recent AAII investor survey is out and has reversed its bullish although more neutral position of last week. Bulls rose to 51.5%, from 42.0% last week. Bears dropped to 26.9% from 34.3% the prior week. There are now two bulls for every one bear out there. Below are two charts showing the comparison with the SPX.

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The prior week saw a major reversal in bullish and bearish sentiment and the madness appears to have continued. Maybe confusion is a better word than madness. The bullish views increased this week to 47.4% from 40.0%, whereas the bearish views decreased to 24.7% from 32.5%. We now have 2 bulls again for every bear. For those unfamiliar with the AAII report it asks the simple question, what is your market view six months out.

Quite the reversal on the sentiment survey this week. Bulls reversed down from last week’s reading of 57.6% bullish to now 40% bullish. The prior week’s reading was the second highest in five years so a reversal should have been expected. Bearish sentiment increased to 32.5% from 28.5 the prior week. We now have 1.3 bulls for every bear, a more neutral level.

Looking at the correlation of the SPX to the AAII report the question now is did SPX just put in a significant top? There is evidence from this chart that it in fact did. Investor Intelligence also just registered a very bullish reading but I must admit I find the correlation of Investor Intelligence to be less reliable to the SPX.