Sentiment has been incredibly bullish since early December.
It's common for the market to top out when sentiment gets to extreme levels, but timing trades off sentiment indicators is largely a fool's game – something made quite clear with the market's nonstop string of record highs.
Stocks just won't break down, and the dip buyers get rewarded every time.
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
Three weeks ago, the VIX made several intraday lows around 9, indicating that traders expect almost no volatility.
The VIX has since bounced around the 11-12 level.
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 78, up from 72 last week.
This index operates on a 0-100 scale, and a reading of 78 means traders are greedy (or bullish).
3) AAII Sentiment – Bullish
Now this is where things get nutty.
The AAII Sentiment Survey shows that 45.5% of survey respondents are bullish, down from last week's 54.1% reading.
However, this number has ben elevated since December 14, indicating that individual investors have been getting more bullish over the past couple of months.
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 0.526, which is extraordinarily low on a historical basis.
And the 3-day moving average, which I use to measure very short-term bullishness, is just 0.537.
So it's the same old story I've been telling for the past month and a half: traders are buying up call options like they're hotcakes, and they're not buying many puts.
Of course, that's been a great strategy because stocks have been so strong.
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 3 weeks:
Well, the trend has gone on a lot longer than seemed reasonable!
I can't remember traders ever being so positive for so long without a single hiccup.
When it ends, no one knows.