Investors Remain Fairly Bullish, Despite Stock Slide, Soaring Oil 16/08/2004 BY KEN HOOVER INVESTOR'S BUSINESS DAILY A 17% Nasdaq fall, soaring oil prices, Fed tightening and terror alerts haven't shaken investor optimism, at least so far. Market sentiment indicators are mixed. Investors say they're bullish, but what they're doing with their money suggests they're more bearish. Still, investors don't seem to be capitulating, a key step before a long, powerful rally. By the time the market bottoms, investors have thrown in the towel. They either retreat to the sidelines with what's left of their cash. Or they decide the only way to make money is by selling short. Many analysts say the picture painted by sentiment indicators isn't what they normally see before a major rally. "We're not there yet," said Carl Swenlin, president of Decisionpoint.com, a Web site that tracks a plethora of sentiment and market breadth indicators. "We haven't flushed out the bulls yet. There's quite a bit of short-term bearishness. But in the long term, investors aren't that bearish." The latest weekly poll of market newsletter writers by Investors Intelligence shows 48.4% of writers are bullish, with just 28.4% bearish. The poll is a widely watched gauge of investor sentiment. It's a contrary indicator. At market turning points, the crowd is usually wrong. So when newsletter writers are collectively bullish, the market might be in for a fall. When they're bearish, a bottom might be near. (The latest readings are published on IBD's general market page each day.) It's not good that newsletter writers remain so chipper. But that might change. "I would guess the next reading will show bulls down," said Michael Burke, Investors Intelligence editor. "A lot of newsletters were written in the middle of last week before the big drops on Thursday and Friday. I would think that would scare a bunch of people along with the drop this week." Even then, that complacency is a far cry from 1994 when Burke's service showed more bears than bulls for 45 weeks. What followed was a powerful bull market in 1995. The Investors Intelligence survey is confirmed by others, such as Market Vane's poll of stock index futures traders and the UBS Index of Investor Optimism. But there's a split between indicators that measure what investors say and what they actually do with their money. Sentiment as measured by bullish and bearish bets on the market show a lot more fear. "I have never trusted what people say, if what they do is in direct opposition to their words," wrote Don Hays in a recent message from his Hays Advisory. One of the most widely followed is the put-call ratio, another contrary indicator. When investors buy an outsized volume of bearish puts relative to bullish calls, sentiment might be too negative. When the ratio hits 1.0, the market may get at least a short-term bounce. That happened March 19, July 6 and Aug. 6. There have been 14 days since May 6 that the put-call ratio was at least 0.9, including Friday. Hays and Swenlin watch the flow into and out of Rydex mutual funds, which lets short-term traders place bullish and bearish bets, with leverage if they like. Swenlin says his analysis of the so-called Rydex ratio comparing bullish and bearish bets shows much less pessimism than was present at the market bottom in March 2003. Some sentiment gauges try to measure what smart money is doing. One smart-money indicator getting a lot of attention is the specialist short ratio, which is the amount of short selling by NYSE specialists as a percentage of total NYSE short selling. It's reported each Friday evening with a week's delay. The theory is that when savvy specialists are doing little short selling, they think the market will climb. "Generally speaking, the way I see it, when the ratio is low, it means the market is in an oversold condition," said Mike LaBranche, CEO of LaBranche, a specialist firm. "It's not so much the specialist thinks the market is going up. It's that no one else thinks the market is going up. They're selling stock to us." Generally speaking, spikes below 0.33 are bullish signals. The indicator called market bottoms in 1990 and 1994. But it flubbed the bull market that began in October 1998. This spring it fell below 0.30 and has stayed there. The report of July 9 had the specialist short ratio at 0.2, an all-time low. Last Friday's reading was 0.24.