John J. Kosar, CMT
Director of Research
Asbury Research LLC

In our March 14th Sentiment Survey, we said; “The first three charts in today’s report indicate that small retail-oriented investors are at a multi-year bearish extreme on US stock prices, while our fourth chart indicates that the market in general is currently terrified that the US stock market will continue lower from here.  History tells us it is at these times that smart investors should be looking for bargains, not running for cover along with the retail herd.”  Since that report, the S&P 500 has risen by 78 points or 6%, and seems to be trying to confirm a near term bottom at the late January and mid March lows.
In today’s report, we display and discuss the latest sentiment data according to four different types of investors, all which continue to suggest favorable conditions for a near term bottom to emerge in the US stock market.

Our first chart measures investor sentiment on the US stock market from the perspective of the hedge fund manager.  It displays the S&P 500 (SPX) in the upper panel and the Greenwich-VanHedge S&P 500 Macro Sentiment (%Bulls minus %Bears) Index in the lower panel.  The Greenwich Alternative Investments Macro Sentiment Indicators are based on a survey of hedge fund managers employing a macro view and who manage, in aggregate, in excess of $30 billion in assets. These data indicate how these managers believe the S&P 500 will perform over the current month.
The green highlights point out that the S&P 500 has typically set a near term bottom whenever these hedge fund managers moved to a multi-year most bearish extreme of 26% bearish or greater.  At 33% bearish for April and coming off of a 36% bearish reading for March, these data suggest that hedge fund managers may have already reached their bearish extreme which, if history repeats, should coincide with or lead at least a temporary rebound in the US broad market.
Our next chart gauges investor sentiment according to the retail investor.  The chart displays S&P 500 in the upper panel, and a survey-based measure of bullish retail investor sentiment on the SPX in the lower panel. 

The green vertical highlights on the chart point out that least bullish (meaning most bearish) extremes of just 21% bullish or less have coincided with most every near term bottom in the S&P 500 since 2004.  The most recent of these extremes occurred in March (rightmost green highlight) and, judging by this measure’s still-low reading of just 40% bullish, there is still a lot more room for the index to rise before opposite most-bullish extremes (blue vertical highlights), and the likelihood of a near term top, are reached.
Our next chart (next page) looks at investor sentiment on the NASDAQ 100 according to leading market advisors, commodity funds and major brokerage houses, all which tend to follow the same trend-following approach as the predominantly retail clientele that they serve.
The chart displays the NASDAQ 100 (NDX) in the upper panel, and the percentage of these market professionals that are bullish on the NDX in the lower panel.  We are looking at investor sentiment on the NASDAQ 100 this time because aggressive Technology stocks tend to lead the broad market higher during periods of overall market strength.

The green vertical highlights on the chart show that these market professionals are current rising from a March “least bullish” extreme of just 30% bullish or less which, as was the case in our previous chart, had coincided with the most important bottoms in the NDX during the past five years.  These data indicate favorable market conditions, from an investor sentiment standpoint, for another similar bottom to emerge now.  Moreover, the “bullishness” of these entities, although it has increased since March, is still nowhere near the opposite “most bullish” extremes (marked by the blue highlights) that have coincided with most of the important peaks in the NDX during this period.  Accordingly, these data suggest that the NDX has already set a near term bottom but still has plenty of room to continue higher before this emerging rally runs its course.
Our final chart (next column) looks at investor sentiment from a small retail options trader’s point of view.  The chart displays the S&P 500 in the upper panel, and the buy-to-open put/call (put volume divided by call volume) ratio for small traders (between 1-10 contracts) in the lower panel.
The blue highlights on the chart point out that a relatively low number (of puts-to-open versus calls-to-open) in the ratio indicates a “least bearish” extreme by these investors which, as a contrary indicator, has coincided with literally every important near term peak in the S&P 500 since 2004.  Conversely, the green highlights point out that an opposite, relatively high number in the ratio indicating a “most bearish” extreme has coincided with or led most every significant near term bottom in the SPX during this same period.  The most recent of these high extremes is taking place right now, which suggests that another bottom is emerging in the US broad market that is similar in importance to those others highlighted in green on the chart.  Moreover, we wouldn’t expect the current rise from the recent lows in the SPX to end until the ratio in the lower panel migrates back down to its previous low extremes, indicating an opposite “least bearish” (or most bullish) condition by these investors.

Conclusion and Investment Implications
For today’s report we chose four investor sentiment gauges that together cover a pretty broad spectrum of different types of stock market investors, from hedge fund managers to brokers to small options traders.  Every one of them strongly suggests that the US stock market is either establishing a near term bottom now, or has already done so at the mid March lows.
Although some of our longer term, more asset flow-based measures (not shown in this report) continue to warn that there is still another leg lower coming within the current October 2007 downtrend, the data in this report strongly suggest that any further downside from here in the US stock market is probably limited at best without a least a several week corrective rally first.

April 28, 2008

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