Did Traders Wake Up with the Shake Up?


On Thursday, we had our first hint of real volatility since October 25.

The the SPX dropped -1.1% to an intraday low of 2566.33 before a bounce up to close at 2584.62.

The VIX also rose over 20% to 12.19 before faltering.

This came on the heels of some minor equity market deterioration as small caps and banks retreated.

So let's take a fresh look at our sentiment indicators to see how traders are feeling after the shakeup.

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

1) VIX Spread – Bullish

As noted above, the VIX spiked over 20% on Thursday before coming back down, and it was at 11 Friday morning.

This gives us a 3-month spread of about +3.50, which means traders are moderately.

(click here for a primer on the VIX spread)

2) CNN Fear & Greed Index – Bullish

The Fear & Greed Index is at 54.

This index operates on a 0-100 scale, so a reading of 54 is almost perfectly neutral.

5 weeks ago, the index hit multi-year highs at 95, but it's come back down to earth.

Funny — a lot of folks thought that 95 reading meant we were peaking. But markets kept pushing higher, showing how difficult it is to time market moves from sentiment indicators.

3) AAII Sentiment – Bullish

The latest AAII Sentiment Survey shows that 45.1% of individual investors are bullish, flat from last week..

This is above the long-term average of 38.5%, so it shows bullishness.

In fact, this 45.1% level is the highest reading since January 5, 2017.

AAII sentiment has been depressed throughout 2017 despite the market hitting a nonstop streak of all-time highs.

This seems like a notable change.

4) CBOE Equity Put-Call – Bullish

The CBOE Equity-Put Call ratio was at 0.64 on Thursday, slightly below the 0.655 long-term average.

The 10-day moving average is 0.631, which is slightly above the long-term average, indicating higher-than-normal demand for put options.

I would call this very slightly bullish. So it looks like the little Thursday shakeup has had little to no impact on traders' general bullishness


Out of 4 sentiment indicators, we have:

  • 3 bullish (down from 4 last week)
  • 1 neutral  (up from 0 last week)
  • 0 bearish (flat last week)

Make no mistake, the crowd is bullish.

But it's less bullish than last week, and certainly less bullish than 5 weeks ago, when the CNN Fear & Greed Index was hitting multiyear highs. Incidentally, the VIX was setting new all-time records for weakness.

So while the permabears are still saying the crowd is complacent, I'm not convinced.

On October 6, I said this: Let's not mince words: the bulls are clearly insane. They think they're destined to ride into the sunset on a magic carpet made of cold hard cash.

Turns out those bull were right, though they've backed down from their optimism just a bit.

Now we're about to see if sentiment has pulled back enough to set the stage for another rally.

I'd keep a close eye on the Russell 2000. It it rockets back up, the bulls are bound to go gaga once again.

For now, it looks like a failed bull flag pattern is on the table:

In an ideal world, the bulls will at least push it back into that upper range.

Then again, the bulls haven't needed an ideal world to find reasons to keep on buying.

We'll see if that changes.

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