Market Indicators - Investor Sentiment
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» Normxxx - . . . Where Angels Fear To Tread.
THE STRIKING PRICE, Barrons
At Market Close | 23 January 2004
Red Bull By KOPIN TAN
BULLS HAVE BEEN KNOWN TO CHARGE at the sight of a waving red cape. So it's hardly surprising that the recent appearance of some red flags served only to swell the bullish stampede in the options market.
The red flags were raised when one sentiment indicator after another pointed to investors' mounting optimism. In less exuberant times, contrarians would promptly proclaim that the market had become irrationally confident and begin betting against the crowd. But with stocks plowing bullheadedly ahead, contrarians were too busy getting out of the herd's way to call these cows mad.
Option volume surged to an all-time high. The month isn't over yet, but it already has produced seven trading days that made the list of the 10 busiest ever, according to the Options Clearing Corp. Average daily volume in January has surpassed six million options, compared with 2003's record 3.6 million.
Hopes ran high, with many investors buying calls to place leveraged bets on favorite stocks. At the International Securities Exchange, the ISEE sentiment indicator jumped early last week to its most bullish reading in 13 months, as customers at the electronic market bought 3.04 new calls for every new put.
Brokers fielded inquiries from people looking for the next stock or call that might double in value. Takeover speculation increased, and amid the buzz about bank consolidation, investors last week snapped up calls in potential takeover targets such as Sovereign Bancorp, Washington Mutual, Comerica and Commerce Bancorp.
At the Chicago Board Options Exchange, the volatility index, or VIX, closed below 15 for the first time since 1996. VIX is a measure of anticipated market volatility, and traders simply aren't expecting any drama these days -- not when the stock gauges move in such small, soothing steps.
Identifying the market's bullish bent is easy; the tougher call is pinpointing when buyers' remorse might set in. Traders noticed some investors buying defensive puts or put spreads in broad-market indexes as well as in exchange-traded funds tracking sectors such as financials, software and technology. But these lack the bite of true bearish bets, and seem more like cautious money managers dutifully insuring against a temporary pullback.
-- posted by Normxxx
» Normxxx - Short Interest
From A Usually Reliable Source
The corrected short interest ratio (for seasonal and volume changes) shows that traders are actually quite a bit shorter than average – in fact, they’re shorter now than at any other time since March of 2003.
One year after the short interest ratio gave a reading above 2.5, the Nasdaq was an average of 35% higher. Conversely, a year after the short interest ratio became very low, defined as under 1.7, the Nasdaq was an average of 19% lower. This data is skewed drastically by the year 2000, and we don’t have very many samples anyway, so we can’t extrapolate this too far into the future with any degree of confidence. Still, I believe it’s a point worth pondering, since the current ratio is about 3.1..
Because shorting can be such a high-risk proposition, it has been an effective indicator of investor emotions in the past. Low levels of shorting means that traders are afraid of rising prices (thus costing them dearly on the stock they sold and have to buy back at a potentially higher price), and in the true manner of a contrary indicator, this has generally coincided with market peaks. On the other hand, high levels of shorting show that traders are piling on and shorting stock to a great degree, hoping to profit on further price declines. Extremely high levels of short interest have been very good buy signals in the past, since those holding short stock provide a sort of “fuel” for the market as they buy back their shares to protect themselves from loses in a rising market.
High short interest ratios should therefore be bullish for the market; low short interest ratios should be bearish. Generally, that proves to be the case but, as with any indicator, there are some failures. Still, overall, the data has been pretty good at highlighting times where emotions were at one extreme or the other.
The NYSE specialists, on the other hand, are net long (and have been for some time). This is highly unusual; they are usually net short. Plus, they are usually right about the market at the extremes, and they are currently near a net long extreme.
-- posted by Normxxx
» ACousins - Re: Short Interest
In response to message posted by Normxxx:Complacency R Us. It did feel like 1999 so a little orderly panic would be a good thing...right?
http://stockcharts.com/def/servlet/SC.we...
Interest rates, above moving averages now
-- posted by ACousins
» Normxxx - Bear Stats
Stat of the Day: During January, insider selling reached $3 billion as company executives unloaded this much of their own corporate stock. Following 2001, this was the second-highest figure for January inside sales volume. Additionally, this was the sixth consecutive month that the amount of selling exceeded the historic five-year monthly average, which is $2.7 billion. On the insider buying front, executives scooped up just $71 million worth of their own stock, a decline of 42 percent from December and the most lackluster January reading since 1995.
Sentiment Readings: At Investor's Intelligence, the bullish reading rose two percent to 57, while the bearish reading was unchanged at 19 percent . Jay Shartsis, director of option trading at R.F. Lafferty, said Wednesday that options traders are investing about 25 cents on protective put positions for each dollar spent on bullishly-positioned call options. Last month, speculators were spending just 10 cents on puts for every dollar on calls. This represented an all-time low in the statistic.
-- posted by Normxxx
» Normxxx - David Dreman Says. . .
Business - Forbes.com
Investor Delusions
By David Dreman | Thu Feb 12, 6:04 PM ET
How is it possible that the present mania in tech and dot-com stocks began only 30 months after the implosion of the largest bubble in market history? The speculative juices never gushed as quickly after any past bubble, and never, never, in the same stocks. What is going on? Investors have simply been swept away on tides of emotion.
An entire academic field, going by the daunting name of affect [theory], has arisen to explain the role of emotion in investments. This theory rests on research done by dozens of internationally respected psychologists such as the University of Oregon's Paul Slovic and Princeton's Daniel Kahneman, a 2002 Nobel Prize winner in economics.
Affect theory shows that we all have our likes or dislikes, ranging from where we want to vacation, to the type of people we like to associate with, to the kind of stocks we want to buy. The more we like something, the more easily we are swayed to believe the object of our affection is without flaw. There is such a thing as falling in love with a stock.
That's why the late-1990s technology breakthroughs made investors believe (many still do) that we were on the cusp of a technological upheaval to match the harnessing of electricity. The outcome would be supernatural profit levels. Thus were rationalized all those insane price/earnings ratios (or for the many companies with no earnings, price/sales ratios).
Here are four investor mistakes, as interpreted by the affect theorists. Make yourself aware of them and do not make them.
•Ignoring the odds. Investors' willingness to buy a stock they strongly believe in is similar whether the odds of success are 1 in 10,000 or 1 in 10 million, says Carnegie Mellon's George Loewenstein in a 2001 study. Other studies show that such blindness to long odds can make investors drive up an exciting stock to as much as 100 times its fundamental value.
•Expecting current trends to persist. When your newly issued stock doubles in price right away, you expect this phenomenon to continue indefinitely. This belief allows investors to pay sky-high prices for a hot stock, making for a self-reinforcing fantasy.
•Buying rosy forecasts, ignoring everything else. When revenues are projected to expand like a chain reaction into the future, investors get caught up in the excitement and overlook any warning signs. New York University's Yaacov Trope and his colleagues call this phenomenon temporal construal. One example is how people in 1999 pushed AOL up to a price that an earnings discount model indicated would be justified only if it had 18 billion subscribers, triple the population of the Earth.
[Normxxx Here: We are still doing that with the likes of Red Hat, Yahoo!, Amazon-- just to name a few off the top of my head. ]
•Letting popularity distort risk perception. As Slovic and Carnegie Mellon's Baruch Fischoff explain in a classic 1978 paper, people underestimate the risks of things they like, such as tobacco, bicycles, favorite stocks. They overestimate the risks of things they don't like--nuclear power, for example. This distortion helps to explain why both professional and individual investors were sanguine four years ago about stocks made risky by their never-never-land P/E ratios. These findings on mental aberrations also undermine the central tenet of efficient market theory, which is that prices are rational reflections of all available knowledge.
How do you escape these pitfalls? Find something solid to put your money into: value stocks with time-tested strengths. You will know them by the sound fundamentals and the absence of any swell of excited voices. Following are three stocks that provide good value today:
Capital One Financial (NYSE:COF) is one of the largest credit card companies in the U.S. It has continued to show good growth through the current softening of consumer spending and should see earnings accelerate with an expanding economy. Bad loan charge-offs should shrink; meanwhile, the company is going after wealthier, less risky customers. Capital One trades at 14 times trailing earnings; it yields 0.2%.
Cardinal Health (NYSE:CAH) is the leading U.S. supplier of pharmaceuticals and medical supplies. Cardinal has reported better than 20% annual earnings growth over the last ten years and should maintain a growth pace well ahead of the S&P 500 average in the immediate future. The company recently concluded a $1 billion stock buyback, and another such program may be coming soon. The stock trades at a P/E of 20 yielding 0.2%.
Pfizer (NYSE:PFE) is one of the largest producers of pharmaceuticals. Inspra, a drug for high blood pressure and heart troubles, recently debuted, and two more, Caduet and Spiriva, have just been approved by the Food & Drug Administration. Pfizer, which should show above-average growth over time, trades at a P/E of 21 and yields 1.8%.
David Dreman is chairman of Dreman Value Management of Jersey City, N.J. His latest book is Contrarian Investment Strategies: The Next Generation. Visit his homepage at www.forbes.com/dreman.
[Normxxx Here: David Dreman's books: Contrarian Investment Strategies and Contrarian Investment Strategies: The Next Generation are stock market classics. ]
-- posted by Normxxx
» Normxxx - Americans Pour Money Into Stock Funds in Near Record Amounts
Americans Pour Money Into Stock Funds in Near Record Amounts full text
By JONATHAN FUERBRINGER | February 13, 2004
The New York Times Americans poured a near record amount into stock mutual funds in January, suggesting that last year's rebound from a three-year rout had restored investors' confidence in stocks.
But the inflow of $40.8 billion last month may not be as positive as it appears. Some analysts consider it a sign that investors may be too bullish, too willing to expect last year's enormous gains to be repeated. The mutual fund data show that many investors are jumping into 2003's best bets, like foreign and smaller company stocks, which have already had big runs.
"The economic fundamentals are good - no one disputes that," said Thomas McManus, equity strategist at Banc of America Securities. "But expectations are high. People should rein in their expectations after a big year like 2003."
The January flows into stock mutual funds, reported yesterday by AMG Data Services and the third best for any month since 1992, show that investors remain strongly connected to funds despite regulatory investigations into trading practices.
Part of the stock fund gains appear to be coming from people saving for retirement. Transfers to stock accounts from fixed-income accounts in 401(k) plans last month were at their highest rate since the Hewitt 401(k) index began tracking such changes in 1997. After a long lull, trading has picked up in recent months at brokerage firms as well. At Charles Schwab, investors placed an average of 221,000 stock trades daily for the first 12 days of January, the highest level in three years and nearly double that for the full month of January last year.
Other gauges of sentiment support the notion that stocks are the place to be. The Market Vane Bullish Consensus, which measures the recommendations of market advisers, stands at 70 percent, a 24-month high and above the 61 percent level it reached in January 2000, before the bull market began unraveling in March of that year. The average of the bullish sentiment index of the American Association of Individual Investors is 61 percent this year, up from 47 percent last year.
There is reason for the renewed faith. No less than Alan Greenspan, the chairman of the Federal Reserve, said this week that the economy should grow at a brisk pace this year. Mr. Greenspan also said he expected worker productivity to be strong and interest rates to remain low, which should buoy corporate earnings.
The three main stock market gauges are up 43 percent or more since the market revival began last March, and neither the Dow Jones industrial average nor the Standard & Poor's 500-stock index have suffered a significant sell-off since April. The Dow closed at its highest level in more than two and a half years on Wednesday, fueled by Mr. Greenspan's remarks and the Disney takeover proposal, though it and the market's other main gauges slipped yesterday.
Despite the stock gains and all the positive indicators of sentiment, many analysts see reasons to be cautious. The last time money poured into stock mutual funds at a pace like this was in the first two months of 2000, with $42.7 billion in January and a record $46 billion in February, according to AMG's data, which goes back to 1992. In March, the stock market bubble burst, sending the S.& P. 500 index down as much as 49.1 percent in the three-year sell-off and the Nasdaq composite index down 77.9 percent.
Analysts are not predicting a sell-off like 2000 now. But some are more inclined to restrain investors than to say keep on coming. The Market Vane Bullish Consensus "is in what we consider nosebleed territory," said Rich Ishida, senior market analyst at Market Vane, which compiles a broad range of market indicators. "We are advising anyone who is real bullish to be cautious."
Some analysts are predicting that the market is ready for a fall of 5 percent or more because the Dow and the S.& P. 500 have been rising without such a correction for 318 days, the 11th-longest run since 1932, according to Birinyi Associates.
-- posted by Normxxx
» doc008 - Thank you
In response to message posted by Normxxx:Your postings on investor sentiment are really appreciated, Normxxx.
By the way, the 70% level on Market Vane Bullish Consensus is actually more than the 24-month high indicated by Jonathan Fuerbringer. The last time Market Vane was higher than 70% was in late 1998, as indicated by the 20-year chart here:
http://www.investmenttools.com/market_va...
From the chart, it appears that never in those 20 years has this sentiment index had this long of an uninterrupted rise.
-- posted by doc008
» Normxxx - Re: Thank you
In response to message posted by doc008:doc008: Thank you for the 'thank you.' It is appreciated.
<img border="0" src="http://online.wsj.com/public/resources/i...">
-- posted by Normxxx
» SteveT - Re: Re: Thank you
In response to message posted by Normxxx:Norm very interesting. Any idea what percentage are trading at 1 to 1.25 X book? Maybe 1.25 to 1.5 X book? 1.5 to 2X book. 2 to 3X book. And more than 3X book? I think that type of data could be of use. It could very well indicate if we are heading for a minor correction or something much bigger.
-- posted by SteveT
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