Sentiment Internal Indicators

Disclaimer
It should not be assumed that the methods, techniques, or indicators presented in this book and seminar will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples in this book and seminar are for educational purposes only. This is not a solicitation of any order to buy or sell. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES IN THIS BOOK and SEMINAR HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS WE STATE MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. The authors and publisher assume no responsibilities for actions taken by readers. The authors and publisher are not providing investment advice. The authors and publisher do not make any claims, promises, or guarantees that any suggestions, systems, trading strategies, or information will result in a profit, loss, or any other desired result. All readers and seminar attendees assume all risk, including but not limited to the risk of trading losses. Day Trading can result in large losses and may not be an activity suitable for everyone. Copyright 1994-2007 by Pristine Capital Holdings, Inc. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without prior written permission of the publisher.
2

Table of Contents Introduction

What moves stocks? Why use Market Internals Ways of Interpretation Historical Levels and Time Frames Course Goals & How to Use

Sentiment Indicators
Determining when the crowd is too bullish or bearish Equity, Total and OEX P/C Ratios Volatility Index (VIX and VXN) Bulls vs. Bears Sentiment Surveys

Intra-Day Internals
TICK TRIN Trading relative strength and weakness Sector Lists Reversal Times Advanced TICK Analysis Advanced TRIN Analysis Advancing minus Declining Stocks Advancing minus Declining Volume. 3 Total Put/Call Ratio

Breadth Indicators
Definition, Importance and Interpretation in Short and Long Term Time Frames Advancing Stocks and Volume Ratios, New Highs, New Lows TRIN, McClellan Oscillator, Advancing Stock Ratio and more

Market Internals Analysis

What Moves This Whale and How Market Internals Time Entries?
The stock market acts as a discounting barometer that reads fundamentals, technicals, and the beliefs of participants all over the world.
Sector Analysis
Sector strength and weakness Market Internals Breadth Sentiment Inter-market

Enter per Trading Plan Manage in between

Reversal Times TPMs

Bonds Commodities Currencies Stocks

Compelling Technical TPMs Pattern

Advance-Decline, Volume, etc. Bull-Bear %, Put-Call, etc.

Inter-Market Analysis

Market Internals Analysis

Why Use Market Internals?

Market Internals provide an objective comparison between the current market environment and the past based on historical references. Market Internals act as gauges that provide us a bias based on what the market is actually doing, rather than relying on others opinions. Similar to a pilot using an airplane's instruments, internals give early warning signals of possible or imminent danger at extremes. Market Internals give us the confidence to hold existing positions, despite prices being extended short-term.
5

Market Internals Analysis Getting The Most From This Short Course
It is imperative that you understand how to interpret the internals patterns, then review historical levels as well as current ones to gain a working perspective.

Internals are not a magical black box. They form different patterns in different market environments, which I will show you. They also lead market turns.

I will show you how to use this information to determine market turning points when multiple internals are in alignment.
6

Market Internals Analysis Methods of Interpreting Indicators

By first reviewing historic extreme levels of an indicator, we can determine trigger levels that may guide us to turning points in the current market. Points of observation in reviewing Indicators: Trend and support and resistance Historical extremes Speed that an indicator moves between extremes The patterns formed at overbought or oversold levels Divergences between price and the Indicator
7

Market Internals Analysis

Bell Curve and Extremes
Normal Distribution
Extremes Extremes

A bell curve is a plot of normal distribution of a given data set. To create our alert levels for any Market Internal, we will encompass about 85 - 95% of the datas range.

Alert Areas

Extremes

Top and bottom lines alert extremes.

Extremes Alert Areas

8

Market Internals Analysis

Historical Extremes are based on the internals prior reversal areas, not the markets price data. Alert areas are where the indicator reversed over an extended period of time. Then compare those alert areas to the market for tradable events.
Moving Average (1.01979)(CLose - 10-MA) 1.100 1.095 1.090 1.085 1.080 1.075 1.070 1.065 1.060 1.055 1.050 1.045 1.040 1.035 1.030 1.025 1.020 1.015 1.010 1.005 1.000 0.995 0.990 0.985 0.980 0.975 0.970 0.965 0.960 0.955 0.950 0.945 0.940 0.935 0.930 0.925 0.920 0.915 0.910 0.905 0.900 0.895 0.890 0.885 0.880 0.875 0.870 0.865

Jul

Aug

Sep

Oct

Nov

Dec

2003

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2004

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

9 9

Market Internals Analysis

The speed that an indicator moves between extremes - A sharp, fast move from one extreme level to the other (A) indicates strength in that direction. How it became overbought can actually suggest higher prices and vice versa.
1170 1160 1150 1140 1130 1120 1110 1100 1090 1080 1070 1060 1050 1040 1030 1020 1010 1000 990 980 0.7 0.8 0.9 1.0

1.1

1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2

8 eptember

15

22

29

6 October

13

20

27

3 10 November

17

24

1 8 December

15

22

29

5 2004

12

20

26

2 9 February

17

23

1 March

15

22

29

5 April

12

10

Market Internals Analysis

The patterns formed at OB/OS levels: Basing at an OB/OS levels indicates strong market breadth. Consolidation often occurs after a sharp move between extremes. A V-type reversal after a move between extremes indicates weak market breadth. V-type reversal
McClellan Oscillator (44.7479), McClellan Oscillator (44.7479)

Overbought (OB)

Basing at extreme

Oversold (OS)
13 20 27 3 10 November 17 24 1 8 December 15 22 29 5 2004 12 20 26 2 9 February 17 23 1 8 March 15 22 29 5 April 12 19 26 3 May 10 17 24 1 7 June 14 21 28 6 July 12 19 26 2 9 August 16 23 30 7 13 September 20 27 4 11 October

230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 -10 -20 -30 -40 -50 -60 -70 -80 -90 -100 -110 -120 -130 -140 -150 -160 -170 -180 -190 -200 -210 -220 -230 -240 -250

11

Market Internals Analysis

Divergences between market new lows and indicator lows (higher lows) indicates internal market strength in a downtrend and vice versa.
1550 1500 1450

Bearish Divergence Bullish Divergence

1400 1350 1300 1250 1200 1150

A B

1100 1050 350 300 250 200 150 100 50 0 -50 -100 -150

A
7 14 ust 21 28 5 11 18 September 25 2 9 16 October 23 30 6 13 November 20 27 4 11 18 December 26 2 8 2001 16 22 29 5 12 February 20 26 5 12 March 19 26 2 9 April 16 23 30 7 May 14 21 29 4 11 June 18 25 2 9 July 16 23 30 6 Augus

-200 -250

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Market Internals Analysis

Course Goals
By understanding how to interpret the internals patterns and noting their historical levels as well as current ones, we can gain a working perspective. Realize that internals are not a magical black box. They form different patterns in different market environments and trigger levels can change. My goal is to objectively show you how to use this information when multiple internals are in alignment, with price always being the final reason to trade. Roll up your sleeves and get motivated as the end journey will be well worth it!
13

Sentiment Analysis

Sentiment Analysis
Breadth indicators focus on market data to show buying/selling pressure as it relates to historical reference points. Sentiment indicators focuses on traders expectations or beliefs about the future of the market whether bullish or bearish.

Based on contrary opinion, the risk of a market pullback is high when the majority are in bullish agreement. When the majority are in bearish agreement, odds are for an advance since most have already placed their bearish trade, and few sellers are left. At extremes in sentiment, our bias will be to act in the opposite direction when other internals and price suggests.
15

Sentiment Analysis
Put-Call Ratios tell us whether people are bullish or bearish in the option market. We will focus on: Equity P/C RATIO Total P/C RATIO OEX P/C RATIO Volatility Index (VIX and VXN) The Market Vane Survey Investors Intelligence Survey American Association of Individual Investors Survey

16

Put/Call Ratios

Sentiment Analysis
Option traders who believe an equity or index will decline buy puts (right to sell stock) to profit from a decline or hedge against long exposure, Bearish. Option traders who believe an equity or index will rise will buy calls (right to buy stock) to profit from an advance or hedge against short exposure, Bullish. Dividing the total volume of puts into the total volume of calls traded gives a put to call ratio and prior extreme reference points of sentiment. The higher the level of a P/C Ratio, the more bearish traders are; think bullish equities. The lower the level, the more bullish traders are; think bearish equities. At extremes, odds of a market reversal increase. 18

Sentiment Analysis
Charting the Put Call Ratio
Put Volume / Call Volume = Put/Call Ratio 326,048 / 376,267 = .86653
Put Volume
750000 700000 650000 600000 550000 500000 450000 400000 350000 300000

Call Volume

Bearish Bets
April May June July

326,048

250000 200000

Bullish Bets
April May June
1.30 1.25 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45

376,267
July August

1050000 1000000 950000 900000 850000 800000 750000 700000 650000 600000 550000 500000 450000 400000 350000 300000

August

Put / Call Ratio

.86653

April

May

June

July

August

19

Sentiment Analysis
The Equity Put/Call Ratio is the total volume of puts divided by the volume of calls traded on the CBOE on individual equities alone. The Total Put/Call Ratio is the total volume of puts divided by the volume of calls traded on the CBOE on individual equities and indices. The Equity and Total Put/Call Ratios are contrarian indicators. These traders tend to be wrong at turning points and are the dumb money.

The OEX Put/Call Ratio is Not a contrarian indicator. Traders buying these options tend to be correct and are considered the smart money.

20

Sentiment Analysis
P/C Ratios have high and low extremes, but they can also trend. During bullish markets, ratios tend to trend lower; bearish markets higher. Using a price channel around the ratios works well for locating extremes as the market environment changes from bullish to bearish and vice versa. By inverting the Equity and Total P/C Ratios (dumb money), their high and low extremes should be in alignment with highs and lows in the market. The OEX Ratio (smart money) is not inverted.
21

Sentiment Analysis
Put/Call Ratios will trend upward in a bullish market and downward in a bearish one. For this reason, using high and low price envelopes will track extremes better.

Excessive Optimism

Ma

rke tD

own

Scale Inverted

nd e r t Up

Excessive Pessimism
Ma
2003

2000 was a peak high for the market and Total Put/Call Ratio (both reached extreme optimism)
1995 1997 1998 1999 2000 2001 2002

tU e k r

Scale Inverted
2004

0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 1.05 1.10 1.15 1.20

22

Understanding Envelopes
Percentage envelopes around a moving average trend with prices, as well as provide extremes based on historical price movements

%
MA

% %

23

Sentiment Analysis
0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2

At (A), was an indication of very extreme bearish sentiment.

Scale Inverted
Apr May Jun Jul

Equity P/C Ratio (A)

Aug Sep Oct Nov

Bullish levels are .9 to 1.0; bearish levels are .55 to .45

0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3

Bullish levels are 1.05 to 1.15; bearish levels are .7 to .6

Scale Inverted
Apr May Jun Jul

(A)
Aug

Total P/C Ratio

Sep Oct Nov

2.5

OEX P/C Ratio

2.0 1.5 1.0 0.5

Bullish levels are .6 to .8; bearish levels are 1.8 to 2.0

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

24

Sentiment Analysis
0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90

A 5-period moving average will be used to smooth the weekly movements of all P/C Ratios.

Scale Inverted
004 Mar Apr May

Equity P/C Ratio 5-MA

Jun Jul Aug Sep Oct Nov

20% 10% 10% 20%

Scale Inverted
004 Mar Apr May Jun

Total P/C Ratio 5-MA

Jul Aug Sep Oct Nov

0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 1.05 1.10 1.15

A 10 and 20 % envelope around a 100-period MA (not shown) of the 5-MA will track extremes.

OEX P/C Ratio 5-MA

1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7

The ratios are not in alignment.

The dumb money traders are bullish and the smart money traders are as well.
25

004

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Sentiment Analysis
S&P 500
1150 1140 1130 1120 1110 1100 1090 1080 1070 1060 0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 1.05 1.10 1.15 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 Novem

Put/Call Ratios act like market sentiment oscillators. In downtrend markets, sell signals will have better odds. In uptrend markets, buy signals will have better odds. In a sideways trending market, buy and sell signals typically have similar odds.

Equity P/C Ratio 5-MA Dumb Money buying calls Scale Inverted

Total P/C Ratio 5-MA

Dumb Money buying puts Dumb Money buying calls Scale Inverted

Dumb Money buying puts OEX P/C Ratio 5-MA Smart Money buying puts

At the August breakdown all P/C Ratios are aligned.

26

Smart Money buying calls

April May June July August September

Sentiment Analysis
Scale Inverted
0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80

A 21-period MA will be used to smooth the monthly movements of all P/C Ratios.

Equity P/C Ratio 21-MA A M J J A S O N D 2004

Scale Inverted

0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00

Total P/C Ratio 21-MA A M J J A S O N D 2004

A 10 and 20 % envelope around a 200-period MA (not shown) of the 21-MA will be used to track sentiment extremes.

Not aligned
1.4 1.3

The trend of the bands are an 1.0 indication of overall sentiment.

1.2 1.1 0.9

OEX A M JP/C J Ratio A S O 21-MA N D 2004

0.8 A M J J A S O N

27

Sentiment Analysis
Bear M
1500

arket
B

1400

An extreme low (A) in the Equity and Total P/C ratios was a signal of capitulation.

et k r Ma ull

1300 1200 1100 1000 900 800

S&P 500
Transition

Equity P/C Ratio 21-MA

0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.4 0.5

A first time move to the upper extreme in over two years in the Total P/C Ratio was a sign of strength (B).

Scale Inverted

(B)
Total P/C Ratio 21-MA OEX P/C Ratio 21-MA

0.6 0.7 0.8 0.9

(A)

Scale Inverted

1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9

(C)

At (C), OEX traders were betting on a decline while the dumb money was not.
28

S O N D 2001

A M J

D 2002

M J J

S O N D 2003

A M J

Sentiment Analysis
S&P 500
1150 1100 1050 1000 950 900 850 800

Once the market moved into a bull phase in 2003, the 21-day Equity and Total P/C Ratios did not move to lower extremes.

Equity P/C Ratio 21-MA

Scale Inverted

750 0.50 0.55 0.60 0.65 0.70

A
Total P/C Ratio 21-MA Scale Inverted

The break of a P/C trendline signals a change in sentiment.

0.75 0.80

A
OEX P/C Ratio 21-MA

0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00

In 2004, option traders turned (A) bearish. OEX traders were bullish. Smart or Dumb money?

1.4 1.3 1.2 1.1

A
A M J J A S O N D 2003 A M J J A S O N D 2004 A M J J A S O N

1.0 0.9 0.8

Bull markets are supported by bearish sentiment.

29

Sentiment Analysis
The Equity and Total P/C Ratios are used as contrarian indicators and the OEX P/C Ratio is not. It is best when all are in alignment. Daily extremes can be an early signal of a market turn. The trend of the Put/Call Ratio suggests a markets bullish or bearish bias. Buy & sell signals will have greater significance dependent on market trend. Alerts are given when a P/C Ratio moves from one extreme to the other. A first time move to an extreme, after an extended trend, can signal change. Put/Call Ratios are an excellent sentiment and market timing internal, but must be used with other internals and price pattern confirmation.

30

Sentiment Analysis
The Chicago Board Options Exchange http://www.cboe.com reports the daily closing Put/Call for the Equity and Total Ratio each day. You can request to be e-mailed each days closing values at the site.

The intra-day Put/Call Ratio values can be seen at the site as well. They are updated every half hour. http://www.cboe.com/data/IntraDayVol.aspx

A rising market with a rising Put/Call Ratio (more puts) is bullish, and suggests a continuation of the uptrend. A falling market with a falling put/call ratio (more calls) is bearish, and suggests a continuation of the downtrend.

Historical data - http://www.cboe.com/data/PutCallRatio.aspx

31

Volatility Indices

Sentiment Analysis
Volatility Index (VIX)
The VIX, and VXN measure traders expectations of future volatility, or lack thereof, by measuring options activity in the S&P-500 and the Nasdaq. When traders become fearful, many go to the options market to purchase puts (right to sell stock). Part of option pricing includes expected volatility, which increases with uncertainty (e.g., pending news like earnings, Fed announcements, a falling market). When expectations are for higher volatility in the market, which is reflective of a bearish view, the VIX rises (expansion in risk premium). When expectations are for lower volatility in the market, which is reflective of a bullish view, the VIX falls (contraction in risk premium).
33

Sentiment Analysis
Volatility Index (VIX)
The VIX is an INVERSE indicator, which means that high readings of volatility (i.e., excess market bearishness) suggests think bullish equity trades; and low readings of volatility (i.e., excess market bullishness) suggests think bearish equity trades. We will also display the VIX as an oscillator with an inverted scale, so oversold readings will show at the bottom of the chart, and vice versa. Like all oscillators, the triggers are determined by applying normal technical analysis to it, confirmed by a reversal in price of the market.

VIX High

VIX Low

34

Sentiment Analysis
1500

S&P 500
LTCM

The VIX and the VXO track

1000

each other almost identically. The

500

values are slightly different. A falling Volatility Index is generally associated with a rising market, and vice versa. During the late 1990s, the opposite actually occurred. While levels change over time, upward moves do indicate traders expectations for higher volatility.
35

50 45 40

Old VXO - OEX

35 30 25 20 15 10 45 40

New VIX - S&P 500

35 30 25 20 15 10

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Sentiment Analysis
Candle Language of VIX Suggests Possible Market Direction. Doji corresponded with market bottom. The Volatility Index forms Support and Resistance Levels.

COG

COG

COG

36

Sentiment Analysis
We gain valuable information from the trend of the Volatility Index; however, it may not be as helpful in determining turning points.
VI Xd ow

n, M

ar k

et

up

Buy Signal

The VIX is interpreted like everything in the Market: Supply and Demand!
37

Sentiment Analysis
VIX.X
Retest suggests reversal

S&P 500

VIX indicated complacency during the market sell off.

While there wasnt price support here, the VIX suggested a possible reversal any day.
38

Sentiment Analysis
Prior VIX high reference point
VIX did Not Breakout (A) (B)
Using the VIX or VXN:
The VIX confirms an indexs move when it is forms an inverse pattern. Non-confirmation of a

Opposite Patterns Confirm

breakdown by the VIX

Opposite Patterns Confirm

breaking out (A) suggests complacency and continuation of the

Breakdown (A) VIX did Not confirm

LL

indexs prior move. Prior highs or lows in the VIX show potential turning points (B).
39

(B)

Sentiment Analysis
VXN and 10-MA
30 25

VXN divided by its 10-MA (1.0 it where the close and the 10-MA are equal)

10-MA

20

C / MOV(C,10,S)

1.10 1.05 1.00 0.95

VXN Oscillator provides a historical reference of the ratio between the VXN and its 10-MA.

0.90 0.85

10-MA of VXN divided by its 10-MA

1.05 1.00 0.95 0.90

NASDAQ 100

1550 1500 1450 1400 1350 1300

November

2004

February

March

April

May

June

July

August

September

40

Sentiment Analysis
Nasdaq VXN Oscillator (Inverted Scale)
0.89 0.90 0.91 0.92 0.93 0.94 0.95 0.96 0.97 0.98 0.99 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 Novembe

Historical overbought

level for the VXN is between .97 and .94. Historical oversold is between 1.02 and 1.05.

April

May

June

July

August

September

October

S&P VIX Oscillator (Inverted Scale)

0.89 0.90 0.91 0.92 0.93 0.94 0.95 0.96 0.97 0.98 0.99 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 October Novembe

Historical overbought

level for the VIX is between .95 and .92. Historical oversold is between 1.03 and 1.06.

April

May

June

July

August

September

41

Sentiment Analysis
VXN
31 30 29 28 27 26 25 24 23 22 21 20 19 18 0.90

The VXN reversal patterns will be used as a guide to confirm reversal patterns in the NDX. Use the VXN Oscillator with other sentiment gauges to

10-MA

VXN Oscillator Inverted

0.95

1.00

1.05

NDX

1550 1500 1450 1400 1350 1300

determine extremes in sentiment. The VIX will be used in the same way.
42

October November

2004

February March

April

May

June

July

August

September Octob

Sentiment Analysis
DOW MINI Futures

Oscillator gives warning signals to price turning points

0.92 0.93 0.94 0.95 0.96 0.97 0.98 0.99 1.00 1.01 1.02

The

Overbought

VIX Oscillator Inverted

Oversold
3 May 10 17 24 1 June 7 14 21 28 July 6 12 19 26 2 August 9 16 23 30 S

1.03 1.04 1.05 1.06 1.07 1.08

43

Sentiment Analysis
REVIEW
The VIX and VXN indicators typically move inverse to markets. The VIX and VXN candle patterns should be opposite to the markets. When the VIX or VXN do not confirm its indexs downward movement, it suggests complacency and lower prices. Prior highs and lows in the VIX and VXN will be used as potential market reversal areas. The VIX Oscillator is used in conjunction with VIX patterns and is especially useful during times of reduced volatility when the VIX is trending. The VIX and VXN Oscillator can be inverted in Metastock to align market highs and lows with oscillator highs and lows. 44

BullishBearish Sentiment

Sentiment Analysis
Contrarian opinion is based on the premise that when the majority of people agree on anything, they are generally wrong at extremes. Based on contrary opinion, the market is considered overbought when the majority are in agreement, and is likely to run out of buyers. It is considered oversold when the majority are in agreement, and likely to run out of sellers. Sentiment Surveys help us to determine what the majority are doing, then we act in the opposite direction when price suggests to.
46

Sentiment Analysis

This type of sentiment analysis is less timely than the others discussed; however, they are powerful indicators of a probable reversal when in alignment with other internals.
47

Sentiment Analysis
AAII Survey The American Association of Individual Investors poll their membership
to determine if they are bullish, bearish or neutral. Since investors tend to change their opinions more quickly, this survey tends to be more timely. www.aaii.com The survey is followed by calculating the ratio of bulls to the total, Bulls / (Bulls + Bears). Because of the more erratic movements in this survey, a 4-week MA is used of the ratio. % Bulls 70
60 50 40 30 20 10 60 50 40 30 20 10

% Bears

Bull Ratio

4-Week MA

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.8 0.7 0.6 0.5 0.4 0.3

1987

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

48

Sentiment Analysis
% Bulls

AAII Survey
70 60 50 40 30 20

Historical Extremes
Bullish levels for % Bulls are 32% and 22%. Extreme bearish levels are 55% and 65%. Bullish levels for % Bears are 38% and 44%. Bearish levels are 20% and 14%.

% Bears

50 40 30 20 10 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.8 0.7 0.6 0.5 0.4

Bull Ratio

Bullish levels for the Bull Ratio are .46% and .36%. Bearish levels are .70% and .80%. Bullish levels for the 4-week moving average of the Bull Ratio are .51% and .43%. Bearish levels are .70% and .78%.
49

4-Week MA

2002

2003

2004

Sentiment Analysis
Investors Intelligence Survey - The survey is done by www.Chartcraftt.com and polls
130 investment news letters to determine whether they are bullish, bearish or neutral. Newsletter writers tend to change their bullish opinions more slowly to bearish than actual investors, making this indicator less timely than the AAII Survey. The survey is followed by calculating the ratio of bulls to the total, Bulls / (Bulls + Bears) % Bulls
80 70 60 50 40 30 20

% Bears

70 60 50 40 30 20 10

Bull Ratio

69

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

50

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2

Sentiment Analysis
Investors Intelligence Survey
60 55 50

Historical Extremes Bullish levels for % Bulls are 45 36% and 30%. Extreme bearish 40 35 levels are 52% and 58%.
30 40

% Bulls

% Bears

Bullish levels for % Bears are 30 42% and 52%. Bearish levels are 25 20 27% and 17%.
35 15 0.80 0.75 0.70 0.65

Bull Ratio
2002 2003 2004

Bullish levels for the Bull Ratio 0.60 are .52% and .43%. Bearish 0.55 0.50 levels are .66% and .75%.
0.45 0.40

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Sentiment Analysis
Market Vane % Bullish Survey The Survey is done by polling the buy and sell recommendations of market advisors and commodity trading advisors relative to a particular market. These advisors change their bullish opinions more slowly to bearish than actual investors, making the timeliness of this indicator less than that of the AAII Survey. The survey is followed by viewing its raw weekly data.
90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 1982 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

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Sentiment Analysis
Market Vane % Bullish Historical Extremes

Bullish levels for % Bullish are 35% and 25%

Bearish levels for % Bullish are 60% and 70%

53

Sentiment Analysis
P P P P O O O O O P P P P P P O

S&P 500 and Signals

1500 1400 1300 1200 1100 1000 900 800

The AAII Bullish % Ratio acts as an oscillator with more frequent readings. Individual investors jump in and out of the market much faster. The Investors Intelligence Bullish % Ratio is not as fast, but will give more frequent signals than Market Vane. Market Vane Bullish % tends to change very slowly. Advisors try to stay with the trend as long as possible.
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4-Week MA of AAII Bullish % Ratio

0.8 0.7 0.6

0.5 0.4 0.7 0.6 0.5

Investors Intelligence Bullish % Ratio

Market Vane % Bullish

0.4 70 60 50 40 30 20 2003 2004

2001

2002

Sentiment Analysis
S&P 500
O
1150 1100 1050 1000 950 900

In August 2004, individual investors became excessively bearish as the S&P 500 made a new low on the year. The Investors Intelligence and the Market Vane Bullish signals are less frequent. The S&P rallied nearly 6% from the signal.
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4-Week MA of AAII Bullish % Ratio

0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45

Investors Intelligence Bullish % Ratio

0.75 0.70 0.65 0.60

Market Vane % Bullish

0.55 70 65 60 55 50 45 40 35 30

2004

Sentiment Analysis
21-Day Equity P/C
0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.5 0.6 0.7 0.8

21-Day Total P/C

0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 0.7 0.8 0.9 1.0

21-Day OEX P/C

1.3 1.2 1.1 1.0 0.9

5-Day Equity P/C

5-Day Total P/C

5-Day OEX P/C

1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 Oct Nov Dec

Jul

Aug

Sep

Oct

Nov

Dec
1200 1190 1180 1170 1160 1150 1140 1130 1120 1110 1100 1090 1080 1070 1060

Jul

Aug

Sep

Oct

Nov

Dec

Jul

Aug

Sep

S&P 500

NYSE VIX Oscillator

Jul

Aug

Sep

Oct

Nov

Dec
0.8 0.7 0.6

0.92 0.93 0.94 0.95 0.96 0.97 0.98 0.99 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 Oct Nov Dec

Nasdaq VXN Oscillator

0.91 0.92 0.93 0.94 0.95 0.96 0.97 0.98 0.99 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 Dec

AAII

0.5

Jul

Aug

Sep

Jul

Aug

Sep

Oct

Nov

0.70 0.65

Investors Intelligence

0.60 70 65 60

By the end of November 2004, only the 21-day OEX P/C Ratio had not moved to an extreme reading. While other sentiments gauges indicated risk of a correction was likely, the market moved sideways.

Market Vane
O N D 2004 M A M J J A S

Weekly
O N D 20

55 50

56

Sentiment Analysis
VIX

AAII

06-19-06
VIX Oscillator Investors Intelligence

Sentiment was bearish, which is bullish!

Market Vane
57

Sentiment Analysis
The 06-19-06 CTOW was titled. The Worst Is Over!

Quote, The expected low just might be the low for the year. I'm speculating on the potential for the low of the year of course, but the internals are coming into bullish alignment now. History tells us that the odds are good and that's all we can look for. It is what it is. Don't over think it.
58

Sentiment Analysis
On 4-29-07, short and intermediate breadth gauges are overbought and/or diverging. Short sentiment gauges are indicating rising risk. Long-term sentiment is still bullish.

06-19-06

S&P 500
59

Sentiment Analysis
Other Sentiment Indicators
Anything that acts as a barometer for suggesting that the bulls or bears have already committed themselves fully, and that a reversal is at hand because of historical extremes. Fun examples: Friends and Family Indicator Brother-in-law and friends call you for advice to buy after 300% run; mortgaging house to plow into market; quitting day job to trade, etc. Shoe Shiner Indicator When the lowest level professions are becoming traders and investors Media asking when Nasdaq (after historic rally over 5,000) will surpass DOW; or when they suggest total liquidation Your favorite Contrarian analyst/friend suggests buy or sell Flipping condos for a living
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Concluding Thoughts
Market Internals provide an objective comparison between the current market environment and the past based on historical extremes. Market Internal gauges should be read in combination with each other. One gauge alone may be misleading. Market Internals guide our bias Bullish Bearish Neutral. This stops us from projecting our own bias that may be based on wishes, fear or greed at the moment. While price is King and what we trade. Consider Market Internals as the Queen, and as we know, the Queen often controls the King!
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Concluding Thoughts
At this point, you have the pertinent information that makes sentiment internals valuable. Its up to you to work with the material and now make it yours, with your own trading style. With this information on sentiment internals, you dont need to be reliant on any market analyst in order to come to your own objective conclusions about market timing. Define an opportunity where the odds are in your favor, then have the discipline to follow your trading and money management rules.

In closing, we at Pristine wish you great success!

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