Sentiment has been incredibly bullish since early December 2017.
It's common for the market to top out when sentiment gets to extreme levels, but there's no guarantee.
And indeed, the bulls have been getting rewarded at every turn since the market just won't break down.
So let's dig into our sentiment indicators to see if traders are still feeling happy.
(click here for a primer on the sentiment indicators below)
1) VIX Spread – Bullish
Two weeks ago, the VIX made several intraday lows around 9, indicating that traders expect almost no volatility.
The VIX has ticked up around 12.
Now, on the surface, that may imply that traders are slightly more cautious.
However, the curve of the VIX futures term structure is very, very flat.
This again means that traders expect near-zero volatiltiy for the next few months. But that's no surprise since we haven't had a 3% pullback in about a decade! (okay, it's not a decade, but it has been more than a year)
So it's 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 72, down slightly from 77 last week.
This index operates on a 0-100 scale, and a reading of 72 means traders are moderately greedy (or bullish).
So no real change here.
3) AAII Sentiment – Bullish
The American Association of Individual Investors just released their latest weekly sentiment survey.
54.1% of survey respondents were bullish, which is well above the long-term average of 38.3%, and a bounce from last week's 48.7% reading.
Two weeks ago, we had a momental reading of 59.8%, which was the highest level since December 2010.
4) CBOE Equity Put-Call – Bullish
The CBOE Equity-Put Call ratio's latest reading is 0.56. This is well below the 0.654 long-term average.
The 10-day moving average is 0.549, which is extremely low on a historical basis.
And the 3-day moving average, which I use to measure very short-term bullishness, is just 0.51.
So it's the same old story: traders are buying up call options like they're hotcakes, and they're not buying many puts.
Of course, that's worked out beautifully for bulls 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've been saying for the last 2 weeks:
Well, the trend has gone on a lot longer than seemed reasonable!
Again, I can't remember seeing sentiment this positive for this long.
And I have to imagine the bears are going nuts, just getting grinded out a penny at a time.
Remember, picking a top based on sentiment is extremely tricky business… so tread carefully.