Weekly Sentiment Update: Some Fear Is Here. But Maybe Not Enough.
Just when everyday seemed to greet me with a smile
Sunspots have faded and now I'm doing time
Now I'm doing time
‘Cause I fell on black days
-Chris Cornell (R.I.P.)
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, traders swung to a moderately bullish stance.
But yesterday, as the Trump/Comey controversy heated up, the SPX dove -1.8% — the biggest one-day decline since September 9, 2016.
That's a span of 172 trading days!
So let's take a fresh look at sentiment and figure out whether the bears are still growling.
(click here for a primer on these 5 sentiment indicators)
1) VIX Spread – Bearish
This morning, the VIX is at 15.89, putting up 66% from the 9.56 generational low on May 9.
The curve is nearly inverted and the 3-month spread is at just +0.1, which means that traders are very fearful.
2) CNN Fear & Greed Index – Neutral
The Fear & Greed Index is at 45, down from 63 last week.
F&G operates on a 1-100 scale, and a reading of 45 is neutral.
3) AAII Sentiment – Bearish
The latest AAII Sentiment Survey shows that just 23.9% of individual investors are bearish, down from 32.7% last week.
This 23.9% reading is well below the 38.5% long-term average, and is the lowest level since November 3, 2016 — the week before the Presidental election.
4) CBOE Equity Put-Call – Neutral
The CBOE Equity-Put Call ratio was at 0.73 yesterday with a 3-day moving average of 0.62. That 0.73 number above historical norms, but this number was also very, very low from Friday to Tuesday, so we'll call it Neutral.
5) ISE Sentiment – Neutral
The ISE Sentiment Index closed at 88 yesterday (88 calls bought for every 100 puts). The 10 day moving average is 94.2.
These numbers show higher put demand, but they're actually in-line with recent averages, so I'll also lump it in as neutral.
Conclusion
Out of 5 sentiment indicators, we have:
0 bullish (down from 2 last week)
3 neutral (up from 2 last week
2 bearish (up from 1 last week
The question everyone's asking is obvious: is there enough fear in the market?
Now, sentiment is undoubtedly more bearish this week, perhaps best illustrated by the spiking VIX and its nearly inverted curve.
However, I'm not sure sentiment is bearish enough to immediately form a bottom.
The CBOE equity put-call ratio did spike to 0.73. That's a mark of fear — but it's not an extreme level. It actually hit 0.96 in mid-April.
I'd love to see a spike above 0.90, and a dip in the ISE Sentiment Index as well.
That would mean traders are aggressively buying put options for downside protection/speculation purposes, which is what you see at the point of maximum fear.
In hindsight, that 9.56 extreme low in the VIX may have been a sign of true froth.
At the time, other sentiment indicators were pointing bearish, but at that point, traders were pricing in almost no volatility, and thus no fear.
Now we're about to see if the volatility train is ready to leave the station after 6 months of nothing.