Short-term Outlook (1-5 Days):  Neutral  From May 19, 1112 SPX

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Equity Indicators - Updates and Extremes

AAII Bull Ratio

Generally, most individual investors follow trends.

When the market goes up, so do their expectations, and vice versa.  So this week's reading in the AAII sentiment survey is very odd - despite a nearly 5% drop in the S&P 500 during the survey period, the Bull Ratio (Bulls / (Bulls + Bears)) actually increased.

This can't be explained away by some freak one-day drop on the last day of the survey, where the majority of votes were already cast.  This week, the market dropped pretty much every day that the survey was open.

The typical contrarian will automatically assume that this is horrible news for the market.  If these guys aren't giving up to an extreme degree, but are in fact becoming even more bullish despite a bad market, then we must surely have more room to drop.

Let's go back to the survey's inception and look for any time the S&P declined 4% or more during the survey period, but the Bull Ratio rose by 5% or more, and see how the S&P did going forward:

The table is ordered with the largest rise in bullishness at the top.  There was a whopping 17% jump in optimism despite a nearly 8% loss in the S&P in October 2008, and a month later the S&P was -6% lower.  That's what we should expect.

But overall, the market didn't really conform to our assumptions.  Over the next couple of weeks, the S&P was positive 7 times out of 10, and with positive average returns.  By three months later, it was negative only twice, and one of those was a miniscule drop of -0.1%.

Even when we only look at instances that had a Bull Ratio higher than our current one, the numbers don't really change that much.

In order to become more optimistic on the market's prospects, I would very much prefer to see the Bull Ratio drop to 30% or below, showing a complete give-up among individual investors.  But while this week's reading seems like it should be more of a sell signal than anything, that's not at all supported by what's happened before.

Inverse ETF Volume

Investor's pulled a huge amount of money out of equity funds over the past week, more than $12 billion according to the Investment Company Institute (the Lipper numbers will come out tomorrow).

So where's that money going?  Some of it surely just went to money market funds.  Some of it probably went into options and individual stocks.  Part of it went to exchange-traded funds...and the inverse funds in particular.

The chart below shows total volume in the more popular inverse ETFs.  Yesterday, it surged to nearly 150 million shares, one of the highest amounts we've seen in the past year, and one of the highest ever if we cheat and exclude October/November 2008.

Given the market's tendency to rebound following such spikes, the temptation is to expect the same now.  But let's take one more look at the data, this time expressed in terms of total NYSE composite volume:

The picture doesn't change too much when looking at the past year, but when we consider the past few, the current number becomes less intriguing.

Previous extremes saw inverse volume account for 2% - 2.5% of total volume, but now we're sitting at about 1.5%.  That's still a lot - it was under 0.5% this spring - but it has gone much higher near other lows over the past few years.

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