Weekly Sentiment Report: Did the Bulls Just Go Too Far?
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 a rapid increase in bearishness.
The moment the Nasdaq started looking shaky, traders started scooping up put options in advance of a larger fall.
But in keeping with the big 2017 trend — that every dip turns out to be buyable — the market steadied itself, largely on the back of a big bounce in biotech this week.
So with the Nasdaq crawling out of its hole, let's take a fresh look at our 5 sentiment indicators.
(click here for a primer on the 5 sentiment indicators below)
1) VIX Spread – Bullish
The VIX has dropped a bit to 10.10, which keeps it within range of generational lows.
The 3-month curve is at +3.63, which indicates traders are moderarely bullish.
This is roughly the same as last week.
2) CNN Fear & Greed Index – Neutral
The Fear & Greed Index is at 53, up just a bit from 52 last week.
F&G operates on a 1-100 scale, and a reading of 53 is neutral.
3) AAII Sentiment – Neutral
The latest AAII Sentiment Survey shows that 32.7% of individual investors are bullish, up slightly from last week.
This 32.7% reading is below the 38.5% long-term average, and indicates that individual investors are basically neutral.
Throughout this year, individual investors have tended to not trust the market that much, and this indicates nothing's changed.
On a related note, earlier this week, I compared 2017 AAII numbers to those back at the 2007 market top.
Individual investors were downright loony in October 2007, not the least bit worried about the deteriorating housing market.
Today, they're much more skittish.
4) CBOE Equity Put-Call – Bullish
The CBOE Equity-Put Call ratio was at 0.50 yesterday. As Marc Eckelberry posted earlier, this is a 6-month low.
The 3-day moving average is just 0.60.
These numbers are below historical norms and indicates that traders are bullish. This is a big turnaround from last week.
5) ISE Sentiment – Bearish
The ISE Sentiment Index is at 100, indicating equal demand for calls and puts. However, the 10 day moving average is just 74.2 (74 calls for every 100 puts)
This indicates that traders are bearish.
Conclusion
Out of 5 sentiment indicators, we have:
- 2 bullish (up from 1)
- 2 neutral (unchanged)
- 1 bearish (down from 2)
Clearly, traders are more bullish than last week.
They're not “all in” but the mood has gotten much happier.
In particular, it seems that options traders are betting on a big pop into quarter-end.
That rock-bottom 0.5 reading in the CBOE equity put-call is a sign of complacency — though that's not confirmed by the other indicators.
If the 3-month VIX spread was near +5, I'd actually advocate shorting, or going long something like VXX.
That would mean traders saw almost no risk ahead, essentially setting themselves up for a fall.
Near-term, I'd watch to see if biotech can continue powering higher.
If IBB can keep on trucking into the stratosphere, maybe the bulls will finally take things too far.