Complacency Is Making the Contrarians Nervous

A reading over 1.0 indicates bearishness in the market, because a high level of put-buying indicates a rising level of fear. That, of course, is bullish if you're a contrarian betting against sentiment.

The 21-day moving average on the put-to-call ratio read 0.57 at last Friday's close. At the start of the rally back in the first week of March, the daily put-to-call ratio ranged from 0.75 to 0.93.

"Typically, traders like to see the put/call hit 1.5 or higher to get an oversold signal," says Smith. "But on a big down day, such as a market crash, it can hit extreme readings of 4 or greater. On the other hand, a reading of 0.50 or below indicates a high level of bullishness. So contrarians might think the market top is at hand and start selling."

Mutual Fund Inflows

Although the mutual fund industry might have lost its moorings recently, it still pays to watch the flow of funds into the largest ship on the financial sea.

Arcata, Calif.-based AMG Data Services provides information on mutual fund money flow and holdings data every Thursday at 7 p.m. New York time. In order to provide this data, AMG collects and verifies data from more than 500 sources on 16,900 open-end mutual funds with total assets of about $6.3 trillion. AMG updates mutual fund holdings reports as they are filed with the Securities and Exchange Commission.

Last week, AMG announced that U.S. stock and mutual funds extended their streak of positive weekly flows to seven, with investors shoveling $1.3 billion into stock funds for the period ending Dec. 23. About 58% of the flows went into domestic stock funds.

For contrarians looking for a trend, the flows were smaller than the $1.9 billion that the stock funds took in during the prior week. At the beginning of the market's climb, AMG reported equity fund outflows -- not inflows -- of $3.7 billion for the week ending March 5, 2003.

Odd Lot Balance Index

The Odd Lot Balance Index is a market sentiment indicator that shows the ratio of odd-lot sales to purchases. An "odd lot" is a stock transaction of fewer than 100 shares. The contrarian assumption is that the "odd lotters" -- the market's smallest traders -- are invariably the last ones to arrive at a bull market party and the first to leave.

Barron's publishes the NYSE Members' odd-lot trading statistics two weeks after the information is delivered to the SEC.

For the week of Dec. 12, the odd-lot index was 101.36%, compared with 96.52% for the week of Dec. 5.

When the balance index is above 100%, odd-lotters are selling more than they are buying, and are therefore bearish on the market. To trade against them, a contrarian takes that as a buy signal.

Contrarians studying the OLBI last year at this time would have done well if they had bet against the little guy. One year ago this week, the OLBI ratio was up to 136.5%.

Happy New Year!