Sentiment Report: Bears Fight the Pain Trade
We're closing out another week full of record highs as the market eats everything it sees and smiles.
The SPX, Nasdaq Composite, Nasdaq 100, and Dow Jones Industrial Average made new all-time highs, which had the bears coming out of the woodwork to say traders are too complacent.
Is that true?
After all, sentiment has been super bullish as of late, and higher prices typically means
But let's take a look at our 4 sentiment indicators to see how traders are feeling.
(click here for a primer on the sentiment indicators below)
1) VIX Spread – Bullish
Since October 6, 2014, when the CBOE changed the VIX calculation methodology, we've had a total of 58 days with a VIX low under 10.
58 of them have happened since April. And with Friday's 9.59 print, we've had 16 in the past 16 days.
So we're either looking at a new normal of incredibly low expectations for volatility, or the crowd has gone mad.
Meanwhile, the 3-month spread is at +4.1, which means traders are very bullish.
However, the spread be wider if the VIX curve wasn't so flat, which itself is a sign of very low expectations of volatility.
(click here for a primer on the VIX spread)
2) CNN Fear & Greed Index – Bullish
The Fear & Greed Index is at 78, down substantially from last week's multi-year high at 95.
The F&G Index operates on a 1-100 scale, and a reading of 95 qualifies as extremely greedy.
So again, we're seeing extraordinary bullishness.
3) AAII Sentiment – Neutral
The latest AAII Sentiment Survey shows that 39.8% of individual investors are bullish, up slightly from 35.6% last week.
This is slightly above the long-term average of 38.5%, so it's basically neutral.
4) CBOE Equity Put-Call – Neutral
The CBOE Equity-Put Call ratio was at 0.70 on Thursday, which is above the long-term average of 0.655. This indicates some skittishness ahead of Friday's CPI report, which turned out to be weaker than expected.
The 10-day moving average is 0.641, which is slightly below the long-term average, indicating higher-than-normal demand for call options.
I would call this basically neutral. Put demand has definitely been picking up since early December, when traders were going nuts for call options.
Conclusion
Out of 4 sentiment indicators, we have:
- 2 bullish (down from 2 last week)
- 2 neutral (up from 1)
- 0 bearish (down from 1)
Last week, I declared “the bulls are clearly insane. They think they're destined to ride into the sunset on a magic carpet made of cold hard cash.”
Insane or not, the bulls were right to be insane because the market has simply refused to break down, and in fact, may be tracing out a classic bull flag.
I was awfully temped to get long volatility this week, and I'm glad I resisted the urge because the current market scenario — a slow grind up without much intraday movement — is deadly to long volatility trades.
Why?
Because it kills you a penny at a time. At least if you lose in a one big whoosh, you can be done with the trade and move on.
What we're seeing now is one of the nastiest pain trades I've ever seen.