Weekly Sentiment Update: The F.O.M.O. Train Is Unstoppable… for Now
Permabulls always say everyone's bearish.
And permabears always say everyone's bullish.
But let's look at the actual numbers to see how the crowd actually feels.
Last week, we saw traders show less more fear after the SPX broke to new all-time highs.
And the question I asked was whether we were set for a F.O.M.O.-driven ride up to SPX 2500.
With markets still clawing higher, it looks like the answer is yes.
So let's take a fresh look at our 5 primary sentiment indicators to see if the ride towards 2500 has made the bulls overconfident.
(click here for a primer on them)
1) VIX Spread – Bullish
The VIX dropped as low as 9.65 Friday, putting it within range of the the 9.56 generational low on May 9.
A couple of weeks ago, the VIX curve nearly inverted, but the 3-month curve is at +3.7, indicating traders are not pricing in much near-term volatility.
Or in plain English, folks are bullish.
2) CNN Fear & Greed Index – Neutral
The Fear & Greed Index is at 59, up from 56 last week.
F&G operates on a 1-100 scale, and a reading of 59 is pretty much neutral.
3) AAII Sentiment – Bearish
The latest AAII Sentiment Survey shows that 26.9% of individual investors are bullish.
This 26.9% reading is well below the 38.5% long-term average, and implies that individual investors do not trust this bull move.
4) CBOE Equity Put-Call – Bullish
The CBOE Equity-Put Call ratio was at 0.66 yesterday with a 3-day moving average of 0.66. This is above historical averages.
5) ISE Sentiment – Neutral
The ISE Sentiment Index was at 84 Friday afternoon (84 calls bought for every 100 puts). The 10 day moving average is 89.3.
These numbers show higher put demand, but they're actually in-line with recent averages, so I'll also lump it in as neutral again.
Conclusion
Out of 5 sentiment indicators, we have:
- 2 bullish
- 2 neutral
- 1 bearish
So these numbers are unchanged from last week.
The question to ask is whether we're on the verge of outright forth.
Last week, I said no.
This week… I'm saying maybe.
The AAII Sentiment Survey indicates that individual investors are pretty skittish.
Typically, at tops, you see the masses wanting to get in.
One possibility is that the tense geopolitical climate is preventing investors from getting too bullish, even though volatility has gone to basically nothing since the election.
And the CBOE equity-put call doesn't show rampant demand for call options, another thing we typically see at market tops.
Therefore, I think there's a reasonable chance we charge past SPX 2500 in the next couple of weeks as shorts throw the towel in, unable to withstand the bulls' painfully slow push higher.
And at that point, perhaps crossing a major round number like 2500 really gets the bulls overconfident, setting the stage for a drop.
But for now, let the relentless post-election bid teach you an important lesson: the trend is your friend.
And it can be your friend for a lot longer than may seem reasonable.
So if you want to bet against it, have a really good reason.
I'll end with a tip: if you're reason is “what goes up must come down,” go back to the drawing board!