Sentiment has been incredibly bullish since December 2017.
It's common for the market to top out when sentiment gets to extreme levels, but there's never a guarantee.
And indeed, the bulls have been rewarded with what feels like a nonstop string of record highs.
So let's dig into our sentiment indicators to see if the mood's changed at all this week.
(click here for a primer on the sentiment indicators below)
1) VIX Spread – Bullish
Last week, the VIX made several intraday lows around 9, indicating that traders expect almost no volatility.
The VIX has ticked up just a bit and is hovering around 10.
The 3 month spread is at 2.9, which indicates that traders are fairly bullish.
But what's really interesting is that the curve of the futures term structure is very, very flat.
This again means that traders expect near-zero volatiltiy. But that's no shocker since we're coming off a year without a single 3% pullback.
No surprise that traders expect 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 77, up slightly from 74 last week.
This index operates on a 0-100 scale, and a reading of 77 means traders are moderately greedy (or 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.
The AAII Sentiment Survey shows that 48.7% of survey respondents are bullish, which is well above the long-term average of 38.3%.That was the highest level since November 13, 2014.
However, it's down from last week's rather extreme 59.8% reading. That was the highest level since December 23, 2010!
So it looks like Wednesday's little intraday dip knocked a bit of froth out of the market.
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 0.563, which is also extremely low on a historical basis.
And the 3-day moving average, which I use to measure very short-term bullishness, is 0.583.
So the trend of traders buying tons and tons of call options relative to puts.
Of course, that's worked out great for buyers because the market just won't break down.
Out of 4 sentiment indicators, we have:
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.
And I'll repeat what I said in last week's sentiment report:
Well, the trend has gone on a lot longer than seemed reasonable!
I can't remember seeing sentiment this positive for this long.
Of course, timing trades and determining your portfolio strategy off sentiment indicators is largely a fool's game, so use this data as only one part of your process.