Sentiment has been remarkably bullish since December 2017.
It's common for the market to top out when sentiment gets to extreme levels, but as we've learned in this once-in-a-life-time stretch of happiness, there's no guarantee.
And indeed, even though volatility reared its head this week, the bulls stayed pretty dang happy.
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 hit a 6-month high of 15.42 this week, but it came down to around 13.
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 volatility for the next few months.
(click here for a primer on the VIX spread)
2) CNN Fear & Greed Index – Bullish
The Fear & Greed Index is at 59, down from 72 last week.
This index operates on a 0-100 scale, and a reading of 59 means traders are moderately greedy (or bullish).
So no real change here.
3) AAII Sentiment – Bullish
The AAII Sentiment Survey shows that 44.8% of survey respondents are bullish, which is well above the long-term average of 38.3%.
It's slightly down from last week's 45.5% level, but still bullish overall.
We did see an uptick in investors calling themselves bearish, but it's nothing dramatic.
4) CBOE Equity Put-Call – Bullish
The CBOE Equity-Put Call ratio's latest reading is 0.59. This is slightly below the 0.654 long-term average.
The 10-day moving average is 0.558, which is extremely low on a historical basis.
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 hit a string of new all-time highs in January!
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!
Now, no one knows how this is going to end, or when.
It's very fashionable to point out that eventually, the market's going to blow up in the bulls' faces… but people have been saying that for years.
So let's take things one step at a time. The bears will eventually have their day in the sun, but we just don't know when.
One thing's for sure though: volatility is starting to pick up, so stay on guard. The bears have been fooled time and time again, but sooner or later, they are going to bite.