Are the Growling Bears About to Get Fed?
We're closing out another week chock full of all-time highs in the major indices.
On Thursday, we had a short-lived scare with futures sinking and the VIX jumping 20% in early trading.
But once again, the dip buyers stepped in to stabilize things, and the SPX managed to finish in the green.
That means the pain trade lives on… for now.
So let's take a look at our 4 sentiment indicators to see how traders are feeling following Thursday's minor skirmish.
(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 64 days with a VIX low under 10.
So these days have been occurrences… until now.
With the VIX under 10 Friday, we've had 24 in a row!
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 +4.07, which means traders are very bullish.
However, the VIX curve is so flat that it may be signaling extreme complacency.
(click here for a primer on the VIX spread)
2) CNN Fear & Greed Index – Bullish
The Fear & Greed Index is at 83, marking Extreme Greed. However, it's down substantially from the multi-year high at 95 seen two weeks ago.
Still, this reading is very bullish. we're seeing a lot of bullishness here.
3) AAII Sentiment – Neutral
The latest AAII Sentiment Survey shows that 37.9% of individual investors are bullish, down slightly from 39.8% last week.
This is in-line with the long-term average of 38.5%, so it's basically neutral.
4) CBOE Equity Put-Call – Bearish
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 following Friday's early drop.
The 10-day moving average is 0.672, which is above the long-term average, indicating higher-than-normal demand for put options. This is the highest 10-day moving average since August 24, 40 trading days ago.
I would call this very slightly bearish.
Conclusion
Out of 4 sentiment indicators, we have:
- 2 bullish (flat from last week)
- 1 neutral (down from 2)
- 1 bearish (up from 0)
Two weeks ago, 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.”
With the benefit of 20/20 hindsight, we know they were right to be insane, since the market has set multiple record high since then.
However, traders have grown a bit more skittish, and bears are starting to growl. Not a lot of them, but they're on the move.
The CBOE equity put-call shows that traders are starting to pick up more put options, so some people are bracing for potential volatility.
I'm starting to suspect that's the right move.
The best trade in 2017 has been short volatility, but we may be closer to the end of that game than the start. We're had 24 straight sub-10 prints in the VIX.
Implied volatility has been overshooting to the downside, and I believe it will overshoot to the upside.
But of course, the most important question in financial markets is not who, what?, where, or why.
It's WHEN.
Even if you can predict the future with 100% certainty, you've got nothing if you can't time the trade.