Securities Research Services

Wednesday, January 10, 2007

Sentiment Readings Might Mean this Time is Different

Yesterday's trading was choppy as the market tried to digest the meaning of continuing weak oil and other commodity prices. Falling commodities seem to be projecting an economic slowdown, which is causing some concern before earnings season, which kicks off next week.

Sentiment readings swung into the extraordinarily bullish direction yesterday as an extreme 14-1 QQQQ calls were purchased against puts. As long time readers know, an extreme reading of 2-1 calls to puts is considered overly bullish and tends to proceed a market correction. Readers may also recall, however, that we witnessed similar extraordinary extremes in October right before the market powered higher.

The lesson here is that while overly bullish sentiment is not healthy for continued price highs, an extreme number like yesterday's seems to represent a level of confidence from a group that knows something. So, while we are need to remain cautious here and keep our fingers on the trigger ready to exit if something goes wrong, it looks as if a group of institutional traders is making a similar bullish bet as the one made in October, which paid off handsomely.

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