Do Traders Love the Russell Rocket?
For most of September, stock market sentiment has been very bullish as indices made new highs.
But with this week's astounding surge in the Russell 2000, have the bulls truly gone crazy?
Some traders believe this could be the start of a new “risk-on trade” into year-end, while others think this is the calm before the storm — especially since we're heading into October, a historically volatile period.
So let's take a look at our 4 sentiment indicators to see how traders are feeling.
(click here for a primer on the sentiment indicators below)
1) VIX Spread – Bullish
The VIX hit a low of 9.51 on Friday morning, marking the 10th straight day with a sub-10 print.
Meanwhile, the 3-month spread is at +4.2, which means traders are very, very bullish.
When this number moves above +4.5, then it's a clear sign of froth, and we could be there very soon.
(click here for a primer on the VIX spread)
2) CNN Fear & Greed Index – Bullish
The Fear & Greed Index is at 83, up from 66 last week.
The F&G Index operates on a 1-100 scale, and a reading of 83 qualifies as extremely greedy.
3) AAII Sentiment – Bearish
The latest AAII Sentiment Survey shows that just 33% of individual investors are bullish, down substantially from 40.1% last week.
Frankly, I find this reading bizarre, since it was taken on Thursday, right after Wednesday's massive small cap rally.
However, this reading has been pretty depressed all year, so maybe we shouldn't be surprised.
4) CBOE Equity Put-Call – Bullish
The CBOE Equity-Put Call ratio was at just 0.52 on Thursday, which well below the long-term average of 0.655.
It's also the lowest reading since June 22, 68 trading days ago.
The 10-day moving average is 0.641, which is slightly below the long-term average, and indicate higher-than-normal demand for call options.
So we have a hyper-bullish short-term reading combined with a slighly bullish 10-day trend. On balance, that makes traders moderately bullish.
If we see more rock-bottom readings, that could be a sign of true complacency.
Conclusion
Out of 4 sentiment indicators, we have:
- 3 bullish (flat from last week)
- 0 neutral (down from 1)
- 1 bearish (up from 0)
We have 3 bullish, 0 neutral, and 1 bearish indicators this week.
The crowd is still fairly bullish overall, but a little bit less so than last week, based on the drop in the AAII survey and more neutral bent to the CBOE equity put-call, Thursday's extreme reading notwithstanding.
This week's readings are a little less crazy than last week's but make no mistake about it: the crowd is very bullish.
Looking forward, things are obviously a bit tricky.
The Russell 2000 and banks are strong, which is a good thing, but it's starting to look like they've come too far too fast. We're also seeing weakness in market leader Apple (AAPL), and stagnation in the biotech sector, which is always a key area to watch to judge traders' risk tolerance.
The top callers are still coming out of the woodwork, but keep one thing in mind: trends are always tricky to judge because they can go a lot further than many seem reasonable.
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