French Fried Bears: They’re What’s for Dinner!
The market is certainly pleased with the first round of the French Presidential Election.
Emmanuel Macron scored a victory and is apparently in the driver's seat to win the May 7 runoff against far-right populist Marine Le Pen.
Le Pen supports a vote for a French exit of the election, and assuming Macron wins, a so-called “Frexit” may be off the table.
I wouldn't count Le Pen completely out just yet though. We're still living in an era with the Brexit, President Trump, and Italy's ‘No Vote.'
So anything is possible.
Today, the SPX is up 1% and within striking range of the 2401 all-time high.
XLF is up 2.4%.
The euro is up 1.3% against the dollar.
The French CAC 40 index is up 3.9%.
And the VIX is down a whopping -23%.
So why is this happening?
Why are we making such a big move?
It's simple: the bears built a big, big fire.
And then they fell in it.
Last Thursday afternoon, I pointed out that trader sentiment was looking very bearish heading into the weekend election.
As you probably now, the permabears have been out in force saying that everyone's complacent.
But the numbers showed otherwise.
For example, the American Association of Individual Investors showed that just 25.7% of individual investors are bullish.
That's well below the long-term average of 38.5%.
And as of Friday's close, the 10-day moving average of the CBOE Equity Put-Call Ratio was 0.703, indicating that traders had been stocking up on puts ahead of the weekend.
The last time it was that high was February 8, 2017, when SPX closed at 2294.67. The index then hit 2400.98 on March 1.
And then, there's the ISE Sentiment Index, which measures call options demand relative to put option demand using only opening long customer transactions. (market maker and firm trades are excluded)
Its daily average has been just 84 this year, or 84 calls bought for every 100 puts. That's well below long-term average readings.
So there was certainly no shortage of bears heading into the weekend. (h/t to Marc Eckelberry for pointing this stat out on the Virtual Trading Floor® (VTF).
And when you get a lot of bears bracing for a negative outcome — like a Le Pen victory — that means there's ample fuel for a rally if the news is positive, or even neutral.
The Lesson to Be Learned
High stock prices and valuations do not necessarily equate to bullish sentiment.
At its root, a bull market happens when there are consistently more optimists (buyers) than (pessimists) sellers.
But even with us within 2% of all-time highs, the data shows that there's still an awful lot of folks that are braced for downside.
It doesn't seem to make a whole lot of sense… but when is anything involved with the market perfectly logical?