Did a Whiff of SPX 2500 Makes the Bulls Crazy?
This week, the SPX set multiple records with a new all-time high at 2498.43.
And the index is still within striking distance of 2500, even with a missile launch in North Korea and a terror attack in London.
So are traders complacent?
Are the bulls asleep at the wheel?
Let's find out using our 4 sentiment indicators.
(click here for a primer on the sentiment indicators below)
1) VIX Spread – Bullish
The VIX is once again hovering around the 10 level, indicating that traders are not pricing in much volatility.
The 3-month spread is at +3.86, which means traders are fairly bullish.
When this number moves above +4.5, then it's a clear sign of froth. We're obviously not there yet.
(click here for a primer on the VIX spread)
2) CNN Fear & Greed Index – Bullish
The Fear & Greed Index is at 73, nearly doubling from 38 last week.
The F&G Index operates on a 1-100 scale, and a reading of 73 qualifies as fairly bullish.
3) AAII Sentiment – Neutral
The latest AAII Sentiment Survey shows that 41.3% of individual investors are bullish. This is up huge from 29.3% last week.
This 41.3% reading indicates that individual investors are neutral, though it's much higher than the year-to-date average of 32.9%.
This reading has been fairly depressed all year, so I was surprised to see such a big jump, even with the market's upward momentum.
4) CBOE Equity Put-Call – Bullish
The CBOE Equity-Put Call ratio was at 0.56 Thursday, which is well below the long-term average of 0.655.
The 3-day moving average is 0.5633, and the 10-day moving average is 0.598. Both are also below the long-term average, and indicate higher-than-normal demand for call options.
Conclusion
Out of 4 sentiment indicators, we have:
- 3 bullish (up from 2 last week)
- 1 neutral (up from 1 last week)
- 0 bearish (down from 1 last week)
Traders are much, much more bullish than last week, and this is perhaps best seen in the AAII Sentiment and CBOE equity put-call measures.
AAII sentiment isn't bullish. But it's made a huge jump, and a relatively large number of individual investors just got on board the bull train.
The CBOE equity put-call is even more interesting. It has been below the long-term average for 11 of the past 13 trading days, which implies that traders are loading up on calls.
I love trolling the permabears by correctly pointing out that they always say everyone's bullish — even when the numbers clearly point to bearishness.
But today, the permabears are right.
The crowd is very bullish, which leads to a very logical question: are we set for a fall?
It's tough to say.
I would watch for a drop in the VIX to the 9.5 to 9.75 range. That could mark extreme complacency, providing a possible opportunity to speculate on a market dip and spike in volatility.
In such a scenario, I would certainly consider buying SPY puts, since they provide a cheap, efficient, and liquid way to speculate on a market decline.