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Sentiment Report: Are There Still Too Many Bulls?


Last week, the market was in the most boring position possible. Stocks were consolidating and sentiment looked just a tad bearish.

So there was no extreme in the technical position of the markets, and  no extreme in sentiment either.

That mad it hard to have a firm opinion on where things could go.

We started the week on a happy note, before the bears took control and put in 4 straight down days.

So let's take a look at our sentiment indicators to see if the bulls are freaking out.

(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. Then it slowly drifted back into a more “historically normal” range between 16 and 20.

But it's hovering around 25 on Friday as the fear gets ratcheted up.

The VIX curve is still inverted, with a 3-month spread around -6.00

This means traders are still pricing in significant volatility, which makes sense. Ever since volatility exploded in early February, we've seen a huge expanion in range.

(click here for a primer on the VIX spread)

2) CNN Fear & Greed Index – Bearish

The Fear & Greed Index is at 8, which is dowm from 15 last week.

This index operates on a 0-100 scale, and a reading of 8 means traders are very fearful (or bearish).

3) AAII Sentiment – Neutral

Sentiment among individual investors is turning.

The American Association of Individual Investors (AAII) said that 37.3% of individual investors are bullish, according to their latest survey.

This is a substantial change from last week, when 44.7% of investors were bullish.

The long-term average is 38.4%, so 37.3% is more or less neutral.

4) CBOE Equity Put-Call – Neutral

The newest reading of the CBOE equity put-call ratio is 0.72.

The 10-day moving average is now 0.623, which is slightly below the long-term average of 0.654.

Options traders were insanely bullish from December through early February. Then they got incredibly bearish as markets started breaking down.

Now they're looking modestly bullish.


Out of 4 sentiment indicators, we have:

  • 1 bullish (flat from last week)
  • 1 neutral (flat from 0 last week)
  • 2 bearish (flat from 3 last week)

Sentiment is still modestly bearish.

I'd argue that it's just a little more negative than last week, and certainly not indicative of panic.

This is good for the bears. If the market keeps declining, there are still plenty of bulls that can be turned bearish, which could mean more negative selling pressure.

The bears should be most excited about the CBOE equity put-call ratio, which indicates a lot of call option demand over the past couple of weeks.

Typically, we see very bearish CBOE equity put-call reading around market bottoms, and we're not even close to that. I'd like to see a 10-day moving average above 0.7, and a 1-day reading over 0.8. An extreme 1-day reading sometimes marks short-term capitulation.

Unfortunately, we won't have Friday's reading until the evening. So I'll keep everyone posted Monday morning to see if things change.

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