T3 Live

Sentiment Report: The Lunatic Fringe


Sentiment was very bullish in December 2017.

But the bullishness us turning into straight-up lunacy.

Don't believe me? Just check out the numbers!

(click here for a primer on the sentiment indicators below)

1) VIX Spread – Bullish

The VIX has been making intraday lows around 9 for the past 3 days, indicating that traders expect almost no volatility.

The 3 month spread is at 3.6, which indicates traders are fairly bullish.

But what's really interesting is that the curve of the futures term structure is is very flat.

It's almost shocking how little volatility is being priced in for the next few months. We're coming off a year without a single 3% pullback, so I guess traders see more of the same.

(click here for a primer on the VIX spread)

2) CNN Fear & Greed Index – Bullish

The Fear & Greed Index is at 74, up from 62 last week., which is down just a bit from last week.

This index operates on a 0-100 scale, and a reading of 74 means traders are moderately bullish.

Last week, I was surprised Fear & Greed wasn't higher, but it's rebounding quickly.I'm very surprised at this — I thought it would be higher.

3) AAII Sentiment – Bullish

Now this is where things get nutty.

Last week, the AAII Sentiment Survey showed that 52.6% of individual investors were bullish. That was the highest level since November 13, 2014.

This week, it hit 59.8%.

We haven't seen individual investors this bullish since December 23, 2010!

Let's keep in mind that the AAII sentiment number was depressed for most of 2017, averaging just 35.1%, which was under the 38.5% long-term average.

For years, 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 way, way below the 0.654 long-term average.

The 10-day moving average is 0.556, also is extremely low on a historical basis.

And the 3-day moving average, which I use to measure very short-term bullishness, is 0.503. We haven't seen a 3-day moving average this low since December 9, 2016.

Traders are buying tons and tons of call options.

Of course, that's worked out great because the market just won't break down.


Out of 4 sentiment indicators, we have:

  • 4 bullish (up from 3 last week
  • 0 neutral  (down from 1 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.

Well, the trend has gone on a lot longer than seemed reasonable!

I can't remember seeing sentiment this universally bullish. It feels like it's been a decade since we've had a pullback, and it feels like no one expects one.

That doesn't mean the market HAS to fall… but let's stay on guard, okay?

Leave a Comment: