Sentiment Report: When Extreme Bulls Get More Bullish
The bulls are back in town.
Actually, they've been back for 3 weeks.
Let's move to our sentiment indicators so you can see what I mean:
(click here for a primer on the sentiment indicators below)
1) VIX Spread – Bullish
Late Friday morning, the VIX was as low as 9.96, which is pretty low based on historical norms.
This gives us a 3-month spread at 3.00 indicating that traders are fairly bullish.
But what's really interesting is that the curve of the futures term structure is so flat. It's almost shocking how little volatility is being priced in.
(click here for a primer on the VIX spread)
2) CNN Fear & Greed Index – Neutral
The Fear & Greed Index is at 62, which is down just a bit from last week.
This index operates on a 0-100 scale, and a reading of 62 is basically neutral. I'm very surprised at this — I thought it would be higher.
3) AAII Sentiment – Bullish
Now this is where things get REALLY interesting.
The latest AAII Sentiment Survey shows that 52.6% of individual investors are bullish, up from 50.5% last week.
This is the highest reading since November 13, 2014.
Let's keep in mind that the AAII sentiment number has been depressed all year.
We've been hitting record highs nonstop, but this year's average is just 35.1%. That's below the long-term average of 38.5%.
All year long, the permabears have been saying that retail investors are “all in.”
Well, the permabears are finally correct!
4) CBOE Equity Put-Call – Bullish
The CBOE Equity-Put Call ratio's latest reading is 0.5. This is well below the 0.655 long-term average.
The 10-day moving average is 0.566, which is extremely low on a historical basis.
And the 3-day moving average, which I use to measure very short-term bullishness, is 0.550 — again, very low.
These numbers point to extreme bullishness among options investors, who seem to expect that we're going to start 2018 with a big bang.
Conclusion
Out of 4 sentiment indicators, we have:
- 3 bullish (down from 4 last week
- 1 neutral (up from 0 last week)
- 0 bearish (flat from last we)
On October 6, I made the following melodramatic declaration:
Let's not mince words: the bulls are clearly insane. They think they're destined to ride into the sunset on a magic carpet made of cold hard cash.
I can see both sides of the coin here.
The bulls may be insane… but they may also be right.
Timing market turns based on sentiment indicators is awfully tricky.
And remember, the trend can go on a lot longer than may seem reasonable.
That time, the bulls were right to be so positive.
Will they be right again?
It's hard to tell.
We typically see extreme bullish sentiment at market tops.
But we've had extreme bullish sentiment for 3 weeks now, and the bulls shows no sign of slowing down.
They love this market.
Now, if you're not sure of where to put your money in 2018, I'd check out Scott Redler's 2018 Market Outlook Report.
It includes 24 investment picks that could seriously outperform in 2018, including names in the crypto currency, tech stock, financials, and commodities spaces.