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Traders Are Betting on a Market They Hate

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Last week, traders got fairly bullish following the massive bounce off Tuesday’s spike low.

This week, things are tricker. The North Korea situation is not going away, Hurricane Irma is on the horizon, and the safety trade is picking up, with Treasury yields dropping like rocks.

So let’s see what kind of mood the bull is in ahead of the weekend.

(click here for a primer on the sentiment indicators below)

1) VIX Spread – Bullish

The VIX hit a low of 10.02 last Friday morning, putting it in close range of generational lows. It’s hovering around 12 today.

The 3-month spread is at +3.10, which means traders are somewhat bullish. However, they’re clearly not as bullish as last week when this reading was at +4.41.

Readings of +5 should be considered outright froth, so we’re not even close to that territory.

(click here for a primer on the VIX spread)

2) CNN Fear & Greed Index – Bearish

The Fear & Greed Index is at 38, down from 46 last Friday.

The F&G Index operates on a 1-100 scale, and a reading of 38 qualifies as modestly bearish.

3) AAII Sentiment – Bearish

The latest AAII Sentiment Survey shows that 29.3% of individual investors are bullish. This is up from 25% last week.

This 29.3% reading indicates that individual investors are slightly bearish.

4) CBOE Equity Put-Call – Bullish

The CBOE Equity-Put Call ratio was at 0.55 Thursday, which is well below the long-term average of 0.655.

The 3-day moving average is 0.5933, which is below the long-term average and thus bullish.

These numbers indicate that traders are very bullish

Conclusion

Out of 4 sentiment indicators, we have:

  • 2 bullish (flat from last week)
  • 0 neutral  (down from 1 last week)
  • 2 bearish (up from 1 last week)

We have 2 bullish, 0 neutral, and 2 bearish indicators this week.

This is a slight degradation from last week, when traders were in a fairly buoyant mood.

I find it interesting that the CBOE equity put-call ratio has been so bullish as of late.

The equity put-call has been below the long-term average for 9 of the past 10 days.

Unless traders are shorting massive amounts of calls, it looks like there are a whole lot of folks betting on a big rebound to new all-time highs above SPX 2490.

This implies some level of complacency.

However, the AAII Sentiment Survey remains depressed, even though the SPX is less than 2% off the record. This says that a lot of people are sitting on the sidelines, or are at least worried about the market.

And that’s been a common trend all year.

Bullish AAII readings have averaged just 32.9% this year.

Let’s compare that to 2007, since people love comparing current market conditions to the last top, even though using a sample size of 1 is completely unscientific.

From the start of 2007 to 9/6/2007, bullish AAII readings averaged 41.8%.

So the overall market picture is pretty weird.

I suspect that for some time, traders have been holding their noses while hitting the buy button, and that certainly seems to be the case today.

There’s a lot of money riding on an extension of the bull market. But people don’t trust it.

Isn’t it ironic?

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