Last Week's Comments on Investor Sentiment

The following is Part 3 from my Street Insight comments:

I promised to expand on my investor sentiment comments. Suffice it to say, that while sentiment has indeed grown more bullish as the indexes have rallied, we are still not at levels normally associated with market tops. Here are some of the indicators I track:

• I track the bull/bear spreads in the investor sentiment surveys. The spread in the AAII survey actually fell last week to +16. Over the last few years, this spread has moved into the low 40s before the market topped. Moreover, this indicator registered a negative spread for 14 straight weeks into mid-August, the longest streak since the recession of 1990. So I believe there was quite a build-up of bearish sentiment that can still be unwound.
• The Rydex Nova/Ursa ratio: tracks the flow of funds between bullishly and bearishly tilted funds. This ratio has risen recently from an all-time low of .07 to a recent reading of 0.168. It stood at 0.24 back in January, and 0.43 at the end of 2004. So still quite a bit of room for this ratio to run as well.
• 10-day CBOE put/call ratio: This ratio has also moved back into neutral territory (0.82), after reaching an all-time high back in late May (1.22). So while some of those bearish bets have been unwound, this ratio could move down further before flashing sell signals, typical below 0.70.
• The 10-day ISEE ratio: The chart below shows how this indicator hit all-time lows as recently as September (94). This ratio has a long way to run before it gets back to the highs where it stood in last December (210). That means we would have to see a ton of sustained call buying to revisit those levels, a scenario that would be accompanied by a prolonged rally in the market. Possibly even a MOASR (mother of all short covering rallies).