Weekly Sentiment Update: Bears Are Everywhere and They’re Killing Volatility!


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.

In last week's sentiment update, the data indicated that traders had gone bearish even before the US missile attack on Syria and the nonfarmpayrolls miss.

Yesterday, we clearly saw even more bears coming out of their caves.

So let's take a complete look at where we stand ahead of the long holiday weekend.

1) VIX Spread – Bearish

The VIX is near a 6-month high and the 3-month curve has inverted. Typically, we see this after the market gets wrecked — not when the SPX is less than 3% off all-time highs.

This is definitely bearish.

2) CNN Fear & Greed Index – Bearish

The Fear & Greed Index is at 28, down from 43 last week.

F&G operates on a 1-100 scale, and a reading of 28 means traders are most definitely fearful.

3) AAII Sentiment – Bearish

The latest AAII Sentiment Survey shows that 29% of individual investors are bullish, up slightly from last week's 28.3% reading.

This is well below the long-term average of 38.5%.

4) CBOE Equity Put-Call – Bearish

The CBOE Equity-Put Call ratio was at 0.69 yesterday with a 3-day moving average is 0.70. This is indicates that traders are bearish.

5) ISE Sentiment – Neutral

The ISE Sentiment Index is at 139 (139 calls bought for every 100). The 10 day moving average is just 87. So the recent trend shows higher put option demand.

However, I'll actually call this neutral because the ISE Sentiment index has been so down for so long, that today's 139 reading counts as pretty bullish activity.

Please note: I am strongly considering dumping ISE Sentiment from this weekly update simply because it's almost always reading bearish no matter what happens in the market.

I may replace it with the CBOE Skew Index, which measures how much traders are paying for protection against tail risk.


Out of 5 sentiment indicators, we have:

0 bullish
4 bearish
1 neutral

This is reminiscent of last summer, when we consistently had mixed-to-bearish sentiment and stock prices that looked stretched.

The result was a seemingly endless sideways grind, because bearish sentiment and high valuations are a good recipe of a whole lotta nothing.

The bear case certainty seems the same — what goes up must come down.

So the question is whether market volatility has been low enough for a long enough time for a trend change to actually occur.

Here a chart of the S&P 500 along with realized volatility from last July. I marked the Snooze Periods so you can see just how long the present on has persisted:

As you can see, it's been trending down since October — that's a pretty long stretch considering how much news we've gotten.

When the trend changes, I don't know.

We've had catalyst after catalyst and the market's shrugged it all off. There's been the Fed, a lot of economic data and news, a heavy flow of political news, and an explosion in geopolitical tensions.

But the fact that traders are so bearish implies that the snoozefest could go on for quite a while.

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