Last week, following the explosion in market volatility, the bulls were finally brought down to earth after 13 months of straight-up action.
In January, sentiment was as bullish as I've ever seen it in my 14 years of watching the market.
Now, traders are clearly more fearful, even with 6 days of bullish buy the dip action. Let's dig into our handy dandy sentiment indicators so you can see just how much things have changed.
(click here for a primer on the sentiment indicators below)
1) VIX Spread – Bearish
On Tuesday, February 6, the VIX hit a multi-year high at 50.30, and it was around 30 last Friday morning.
But with stocks rebounding hard this week, the VIX elevator dropped down hard.
As of late Friday morning, the VIX was around 18, right in-line with historical averages.
The 3-month VIX spread is right around 0 now. This means traders are still pretty bearish.
(click here for a primer on the VIX spread)
2) CNN Fear & Greed Index – Bearish
The Fear & Greed Index is at 15, up from just 8 last week.
This index operates on a 0-100 scale, and a reading of 15 means traders are very fearful (or bearish).
This is a shocking change. Fear & Greed was at 76 just a month ago.
3) AAII Sentiment – Bullish
The American Association of Individual Investors' Sentiment Survey shows that 48.5% of those surveyed are bullish. This is up huge from last week's 37% reading.
The long-term average is 38.4%, so we're back in bullish territory.
4) CBOE Equity Put-Call – Bearish
The long-term average of the CBOE equity put-call ratio is 0.64.
And from December 7, 2016 to February 1, there wasn't a single day above that long-term average, which means there was an above-average level of call buying.
The trend changed on Friday, February 2.
Since then, the CBOE equity put-call has averaged 0.716, which means a sudden increase in demand for put options.
So options traders went from incredibly bullish to moderately bearish.
Out of 4 sentiment indicators, we have:
Things have changed, and traders are presented with quite the interesting pickle.
Sentiment has changed so much in the past 2 weeks, and it's evident that fear levels are very high. Traders are freaked out, and perhaps rightly so. We went an eternity without a real pullback, so it could be argued that we should have had a bigger one.
However, Friday marked the 6th straight day of buy the dip action, and the VIX is back to normal levels.
This is is right out of the 2017 playbook. That was when it made sense to buy every single dip, regardless of the news and the ‘feel' of the market. If you didn't comply, you sat back and watched the train leave the station with all the money, every single time.
The big question now is this: is the sudden rush of negative sentiment a sign that there is sufficient buying power on the sidelines to keep the market going?
And if the SPX keps going to say, 2800, will buyers rush because of the greatest fear of all?
You know, the Fear Of Missing Out.