Volatility Returned. But Is There Any Fear Out There?


Volatility is finally picking up!

The VIX hit 3-month highs on Wednesday, and we've had 4 down days in the last 6.

And traders are finally starting to believe we're on the verge of seeing the first real shakeup since the 2016 Presidential election.

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 hit a 3-month high on Thursday.

It's since come back down towards 11 on Friday.

This gives us a 3-month spread of about +3.60, which means traders are moderately bullish.

As you can see in the chart below, the VIX may be breaking out above its depressed 50 day moving average the way it did in August:

(click here for a primer on the VIX spread)

2) CNN Fear & Greed Index – Neutral

The Fear & Greed Index is at 50.

This index operates on a 0-100 scale, so a reading of 50 is perfectly neutral.

Before Thursday's big reversal, it was actually at 35.

On October 6, it hit multi-year highs at 95, so it's obviously 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 – Bearish.

The latest AAII Sentiment Survey shows that 29.3% of individual investors are bullish. This is a major collapse from last week's 45.1% level, which itself was the highest since  since January 5, 2017.

The long-term average is 38.5%.

4) CBOE Equity Put-Call – Neutral

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 0.652, which is right in-line with the long-term average.

So it doesn't get more neutral than this.


Out of 4 sentiment indicators, we have:

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

The permabears are still saying that everone's all-in bullish and 100% complacent… but the numbers tell another story.

If you want to see full-on bullish insanity, go back to October 6 when I declared the following:

“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.”

Of course, I hedged myself by adding that “the bulls may be insane… but they may also be right.”

And the bulls were right, with the major indices continuing to march higher.

Trader aren't bearish. We all know that.

But based on the numbers, it's fair to call the crowd neutral.

This is ultimately good for the bulls. The more doubt there is, the more potential upside firepower.

In particular, if the Russell 2000 can stage a comeback, we could see a major spike in confidence… along with a major spike in price.

Just remember, sentiment follows the action, which makes it awfully tricky to use to time trades. Plus, sentiment can stay at extreme levels for far longer than you think is reasonable.

So always use this information as color — not as specific buy/sell signals.

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