So you want to be a contrarian investor? see the extreme sentiment on retail sector and these stocks

Here are put/call options data showing extreme sentiment on STT, AMGN, RTH, and HL, MO and KO. These are the "top bullish" and "top bearish" extremes shown at the ISE's website this afternoon (included in "other sites of interest" in the list at the right side of this page). You can see the extremes in the numbers of calls and puts as of 4:15 pm this afternon. Notice that one implicates the retail industry - the RTH is an ETF for the retail sector. Given recent analysis floating about the financial community about dour outlooks for retail companies, one must wonder why the crowd is reaching such a bullish extreme on RTH. (The ISE's put/call data reflect opening purchases, so more representative of crowd positioning than position hedging - check their site for more information on this.) For example, just today the stalwart retailer Macy's (M) joined many other companies announcing layoffs (about 7,000) and cutting its dividend (in half). Macy's dropped 4% today, by the way, to end at $8.59. You'd have to think that retail stories like this must signify a huge turnaround, to justify such extreme bullishness in this sector. Especially at the same time that the crowd is very bearish on MO and KO - two companies that one might expect to fare better than other companies during difficult economic times.

Here's a comparison chart showing the RTH retail sector ETF against the S&P 500 since late 2001. This doesn't show the retail sector being very out-of-synch with the broader equity markets during most times. So the chart doesn't justify an idea that the retail sector should out-perform:


As for State Street, Amgen and Hecla Mining - well, no special insight here into these companies. For that matter, if you consider making any investing or trading decisions using these extreme put/call data, you should do some additional diligence (fundamental and/or technical analysis) before wading in. But it may be very worth your while to check these out.

New to the principle of contrarian investing? Extremely "bullish" readings shown by the number of calls heavily outweighing puts can often clue you in that it's time to sell that stock. Conversely, extremely "bearish" readings shown by the number of puts being extreme compared to the number of calls, often tells you that the stock is due for a rally.

My comment at the end of my prior post here, about the TickerSense poll, was based on some sentiment polls being more predictive of market action, such as TickerSense tries to be. Classic contrarians seek to fade the crowd, by determining when mass sentiment on a stock has reached an extreme. Meaning that everyone's feeling optimistic about the stock and has probably gotten to the point of buying all of it they were going to buy, so the tipping point is being reached where no one is remaining to be the next purchaser to support the price ... so the price falls. (The reverse is true when everyone's reached a pessimistic extreme.)

Remember the three "most bullish" we noticed at the ISE recently? - DAL, FXI and GM. And with that post, I showed that Delta Air Lines looked like it was forming a wedge and said "uh oh!"? Here's how all three look in the days since then. DAL performed worse than the others, but none of these three performed according to the "most bullish" expectations:

While we cannot typically follow individual stocks here, we do incorporate the general principle of contrarian investing as we follow the major indicies, currencies, gold and the dollar ... and some key sectors like banking. We do this by keeping an eye on the ISE data for all equities (which closed at about 125 today if my memory is still good - you can check that also, using the ISE link in the list at right), as posted here this weekend. It's an example of how we use a number of methods to keep a pulse on where these markets are heading.

If you are actively investing or trading in particular stocks and ETF's, then consider using put/call data like this as an input if you seek to be a contrarian investor. To be conservative, I would not recommend using only these data to the exclusion of any other diligence when making an investment or trade decision. But if nothing else, extreme readings like this can certainly clue you in that if you're on the side of the extreme crowd, you should double-check your position!

As always - be careful out there, and happy trading!