Did Mr. Market Just Throw Another Sentiment Boomerang?
Last Friday, sentiment got pretty awful in the wake of North Korea's threats of an attack on Guam.
And then early this week, it went full-on psycho bullish after North Korea blinked and backed off.
That was good for me since I'm speculating on a big decline in the VIX… and then it wasn't so good.
With traders fearing that President Trump will have trouble instituting pro-growth policies like tax and regulatory reforms, the VIX spiked as high as 15.77 on Wednesday, up 40% from Tuesday's 11.25 low.
So my nicely profitable trade is now a loser!
Let's take a fresh look at our 4 sentiment measures to see which way the crowd is leaning heading into the weekend.
(click here for a primer on the sentiment indicators below)
1) VIX Spread – Bearish
The VIX is at 14.82 this morning, well above the July 26 all-time low at 8.84, and also above trend for this year.
The 3-month spread is at +0.2, which means the VIX curve is flat. Traders are pricing in quite a bit of short-term volatility, so once again, this reading is bearish.
(click here for a primer on the VIX spread)
2) CNN Fear & Greed Index – Bearish
The Fear & Greed Index is at 19.
The F&G Index operates on a 1-100 scale, and a reading of 19 qualifies as extremely fearful.
3) AAII Sentiment – Neutral
The latest AAII Sentiment Survey shows that 34.2% of individual investors are bullish.
This 34.2% reading isn't terribly far off the 38.5% long-term average, and indicates that individual investors are basically neutral.
I thought this would be lower, but the number is what it is.
4) CBOE Equity Put-Call – Bearish
The CBOE Equity-Put Call ratio was at 0.78 Thursday, which is well above the long-term average of 0.66.
The 3-day moving average is 0.69, which is slight above the long-term average.
The 10-day moving average is 0.74, which is fairly high.
These numbers indicate that traders are very bearish.
Conclusion
Out of 4 sentiment indicators, we have:
- 0 bullish
- 1 neutral
- 3 bearish
The data indicate that sentiment boomeranged in a big way.
Traders were pricing in the end of the world last Friday.
Then they got happy on Monday and early Tuesday.
And now they're depressed again.
You could say volatility is becoming more volatile.
And I think this is a great thing because the market's actually giving some real back and forth action.
That means more opportunities for active traders, and action that's actually interesting to watch.
I don't know about you, but I found June through late July to be agonizing to watch.
Maybe the sudden spike in volatiilty means there's trouble down the road… but at least we'll be awake for it.
Now I'm still speculating on a decline in the VIX.
To be more specific, I am:
-Long VXX puts
-Short VXX call spreads
Will the trade go profitable again?
The ideal situation is a repeat of last Friday to Monday, when sentiment boomeranged from extreme fear to extreme greed in the blink of an eye.
I guess I'm about to find out if that's just wishful thinking…