Traders Don’t Have the Tax Bill Blues… Yet


Two weeks ago, I said “volatility is finally picking up!”

Just like we've seen throughout 2017, like clockwork, the bulls came back in to push all indices up to fresh record highs.

On Thursday, the S&P 500 set a new all-time high at 2657.54, with the Dow Jones Industrial Average crossing over 24,000 for the first time ever.

Traders have been buying because they expect a tax reform bill.

But on Thursday evening, the GOP push hit a wall as some lawmakers objected to the bill because of concerns over the Federal deficit.

That sent futures down Friday morning, so let's see how traders are feeling in the face of sudden uncertainty.

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

1) VIX Spread – Bullish

Yesterday, I pointed out that the VIX was surprisingly strong despite an impressive stock rally.

This morning, the VIX is up 2.1% at 11.52, giving us a 3-month spread at 3.33, indicating traders are bullish.

But keep an eye on the VIX. It's been up for 5 of the past 6 days, and if equity markets weaken, it could spike.

This gives us a 3-month spread of about +3.95, which means traders are very bullish.

(click here for a primer on the VIX spread)

2) CNN Fear & Greed Index – Neutral

The Fear & Greed Index is 73, up substantially from 54 last week.

This index operates on a 0-100 scale, so a reading of 73 qualifies as moderately greedy.

3) AAII Sentiment – Neutral

The latest AAII Sentiment Survey shows that 35.9% of individual investors are bullish. This is flat from last week's 35.5% reading, but it's still way off the 45.1% level from three weeks ago, which itself was the highest since  since January 5, 2017.

The long-term average is 38.5%, so a reading of 35.9% is basically neutral.

4) CBOE Equity Put-Call – Bullish

The CBOE Equity-Put Call ratio was at 0.55 on Thursday, which is well below the 0.655 long-term average.

The 10-day moving average is 0.574, which is very, very low.

In fact, it's the lowest 10-day moving average since December 16, 2016.

And the 3-day moving average, which I use to measure short-term bullishness, is 0.590. That's the lowest since December 21, 2016.

These numbers point to aggressive bullishness.


Out of 4 sentiment indicators, we have:

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

The permabears are still saying that everone's all-in bullish and 100% complacent… and they're right.

However, keep in mind that sentiment was even more positive back on October 6 when I declared:

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 they were right!

All the indices have hit multiple record highs since then, while the bears are still on the floor crying.

But maybe things are changing.

Tax reform is now a mystery and the VIX may be on an upswing.

If the bulls rush to the exits, they may face some trouble — there's an awful lot of them, and only so many can fit through the door at once…

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