Extreme Readings in Bullish Investor Sentiment as Insiders Bail at Highest Rate Ever Tracked

Hallelujah! In a few days the Fed will announce what nearly everyone thinks is the "sure thing" that will propel stocks higher. Supposedly it will be buy the rumor, buy the news, and then keep buying.

Trader's Narrative highlights the picture in Sentiment Overview: Week Of October 29th, 2010

Sentiment Surveys

Contrarian investors should sit up and take notice as we are finally getting a definitive extreme reading from the weekly AAII sentiment survey. According to the survey, the majority of retail US investors believe that the stock market will be higher 6 months from now: 51.2% were bullish and only 21.6% were bearish.

As I mentioned yesterday, this is the first time we are seeing such a larger bullish camp since May 2008 (53%) - this was one of the intermediate peak retracements during the recent bear market. The S&P 500 topped out at 1426 and fell 15% by mid-July 2008.

As well, the bull ratio is now slightly above 70% - something we hadn’t seen for almost 3 years. That is to say, relative to bears, the AAII didn’t have such a large portion of bulls since February 22nd, 2007. This was just before the S&P 500 corrected 6%, falling from 1459 to 1374.



This week’s survey result is the lowest number of bears since mid-January 2006 (19%). In response the S&P 500 was able to trundle along for a few months basically moving sideways but it peaked in May 2006 about 2% above the January bullish extreme date. From there it declined for the rest of the summer. The result was that basically the first 8 months of 2006 were a wash.

Of course, during strong bull markets it can go much higher but in recent years we’ve seen a range for the bull ratio between 30-70% so this is definitely pushing the upper boundaries. As the examples above illustrate, historically when the AAII survey has been this lopsided towards the bullish camp the equity markets have had a tough time. According to Bespoke, from 1990 onwards, when the bullish levels has been between 50-60% as it is now, the S&P 500 index has returned an average of -0.19% in the following month (49.61% were positive).

Trader's Narrative also tracks ABC News CCI, conference board sentiment, consumer confidence, fund flows, investors intelligence, ISE sentiment, Michigan consumer sentiment, NAAIM, OEX options, and put call ratios.

Inquiring minds may wish to give the site a closer look.

Insider Selling Volume at Highest Level Ever Tracked

Investor sentiment is one thing, insider sentiment is another. Behind The Money reports Insider Selling Volume at Highest Level Ever Tracked .

The overwhelming volume of sell transactions relative to buy transactions by company insiders over the last six months in key leading sectors of the market is the worst Alan Newman, editor of the Crosscurrents newsletter, has ever seen since he began tracking the data.

The strategist looked at insider trading activity amongst the top ten companies that make up the Nasdaq such as Apple (AAPL), Google (GOOG), and Amazon (AMZN).

Then he analyzed the biggest members of the Retail HOLDRs ETF like Gap (GPS), Target (TGT), Costco (COST), as well as the top insiders in the semiconductor industry at companies such as Altera (ALTR), Broadcom )BRCM), and Sandisk (SNDK).

The largest companies in three of the most important leading sectors of the market have seen their executives classified as insiders sell more than 120 million shares of stock over the last six months. Top executives at these very same companies bought just 38,000 shares over that same time period, making for an eye-popping sell to buy ratio of 3,177 to one.

The grand total for the three sectors are “as awful as we have ever seen since we began doing this exercise years ago,” said Newman, who was ahead on such trends as the dangers of high-frequency trading and ETFs before the ‘Flash Crash’. “Clearly, insiders are seeing great value only in cash. Their actions speak volumes for the veracity for the current rally.”

“At the risk of sounding like a broken record, we expect a significant correction,” said the newsletter editor.

To be sure, neither excessive nor unwarranted optimism matters until it does.

In the meantime, everyone can take comfort in the fact that the high frequency trading robots that dominate trading don't care about sentiment measures of any kind, earnings, unemployment, the implosion in housing, foreclosure fraud, double-dip recessions, the will for political stimulus drying up, trade imbalances, currency wars, or for that matter anything at all.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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