Did Breaking SPX 2500 Put a Spell on the Bulls?
Last week, sentiment among traders went all-out bullish as the SPX flirted with the 2500 mark for the first time ever.
Subsequently, the SPX grinded up to set a new all-time high at 2508.85 before backing down just a bit.
So let's see what's changed this week.
Are traders encouraged by a more hawkish Fed?
Do they care at all about North Korea?
Let's find out using our 4 sentiment indicators.
(click here for a primer on the sentiment indicators below)
1) VIX Spread – Bullish
The VIX is once again hovering around the 10 level after going as low as 9.54 this week, indicating that traders are not pricing in much volatility.
The 3-month spread is at +3.98, which means traders are fairly bullish.
When this number moves above +4.5, then it's a clear sign of froth, and we could get there soon.
(click here for a primer on the VIX spread)
2) CNN Fear & Greed Index – Bullish
The Fear & Greed Index is at 66, down slightly from 73 last week.
The F&G Index operates on a 1-100 scale, and a reading of 66 qualifies as moderately bullish.
3) AAII Sentiment – Neutral
The latest AAII Sentiment Survey shows that 40.1% of individual investors are bullish. This is down slightly from 41.3% last week.
This 40.1% reading indicates that individual investors are basically neutral, though it's much higher than readings we've seen throughout 2017.
4) CBOE Equity Put-Call – Bullish
The CBOE Equity-Put Call ratio was at 0.66 Thursday, which is right in line with the long-term average of 0.655.
The 10-day moving average is 0.625, which is below the long-term average, and indicate higher-than-normal demand for call options.
Stretching out things just a little bit more, this measure has been below the long-term average for 14 of the last 18 trading days.
So there have been a lot of folks gunning for more upside through the options market.
Conclusion
Out of 4 sentiment indicators, we have:
- 3 bullish (flat from last week)
- 1 neutral (flat)
- 0 bearish (flat)
We have 3 bullish, 1 neutral, and 0 bearish indicators this week.
This week's readings are a little less crazy than last week's but make no mistake about it: the crowd is very bullish.
Last week, I said to watch for a possible drop in the VIX to the 9.5 to 9.75 range, which could mark extreme complacency.
As noted earlier, we got a 9.54 VIX print on Thursday, and maybe we're about to find out if that did indeed mark a near-term top.
Keep in mind, we've had a lot of moments like this in 2017. Sentiment gets super-bullish, technicals look stretched, and the leaders start breaking down. We're certainly seeing that with profit-taking in names like Apple (AAPL) and Nvidia (NVDA), as well as the biotech sector.
And every time, just when it looks like all is lost, the market pulls a rabbit out of its hat and just keeps on chugging.
The market ‘feels' shortable, but one thing has me hesitating: the surging Russell 2000, which has been showing relative strength and looking to makes it own all-time high.
That's a sign there's still an appetite for risk out there, and perhaps more upside to come.
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