All posts by Michael Comeau
Gold in Focus Ahead of Jobs Report
Last week, traders were squarely focused on the progress of the GOP tax bill. But this week, it feels like everyone’s watching Bitcoin so much that the world’s forgotten about the stock market! In fact, look at what’s #2 in the Apple App Store: It’s Coinbase — the app for the popular digital currency market place! Yes, a Bitcoin app is pulling more downloads than Instagram and Facebook! With the November jobs report on the way this morning, let’s dig in and see how how bullish traders are feeling about the forgotten stock market ahead of the weekend. (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish On Friday morning ahead of the November nonfarm payrolls report, the VIX was at 9.97, the first sub-10 reading since November 29. This gives us a 3-month spread at 4.36, indicating that traders are very bullish. (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is 60, dowm from 73 last week. This index operates on a 0-100 scale, so a reading of 60 is basically neutral. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 36.9% of individual investors are bullish. This is basically flat from last week’s 35.9+% reading, but it’s still way off the 45.1% level from 4 weeks ago, which itself was the highest since since January 5, 2017. The long-term average is 38.5%, so a reading of 36.9% is basically neutral. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio’s latest reading is 0.58. This is below the 0.655 long-term average. The 10-day moving average is 0.581, which is very low on a historical basis. And the 3-day moving average, which I use to measure very short-term bullishness, is 0.607. These numbers point to bullishness among options investors, who seem to expect a snap back to all-time highs in the SPX. ConclusionOut of 4 sentiment indicators, we have: 2 neutral (down from 3 last week) 1 neutral (up from 1 last week) 0 bearish (flat from last we) Here’s what I said last week: The permabears are still saying that everone’s all-in bullish and 100% complacent… and they’re right. 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… Sentiment was very bullish last week, but it’s clearly cooled down this week. Judging by the VIX and the CBOE equity put-call, options traders see almost no volatility ahead — and a lot of upside potential. But when we mix in our data from the CNN Fear & Greed Index and the AAII sentiment survey, we a more nuanced picture. Market momentum has slowed, and individual investors are definitely in neutral territory. So clearly, traders are back in the “moderately bullish” camp. That’s not exciting to say, but it’s the truth. The big question now is what impact the jobs report will have on equities. I’m mostly interested in gold. Gold’s taken a big spanking, at least partially because Bitcoin has suddenly attracted a mountain of investor dollars. If we get a weak jobs report, gold could skyrocket, so keep an eye on it
Continue Reading -->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. Conclusion 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…
Continue Reading -->Sentiment Report: Traders Still Happy with the Low Vol Grind
In last week’s sentiment report, I said “volatility is finally picking up!” And then it collapsed all over again as the post-election bull market raged on, with all major indices including the Russell 2000 breaking to new all-time highs. The VIX fell back under 10, and the bears are once again asking “is this low-volatility grind ever going to end? Traders were in a pretty decent mood before Thanksgiving, and they’re looking happier Friday morning with futures bid higher. So let’s take a fresh look at our sentiment indicators to see how traders are feeling on today’s Black Friday “holiday.” (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish Last Wednesday, the VIX hit a 3-month high at 14.51. It’s around 9.85 Friday morning.. That’s extremely low by historical standards, but it’s become the new normal… at least since the summer. 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 at 54, up slightly from 50 last week. This index operates on a 0-100 scale, so a reading of 54 is neutral. Before last Thursday’s big reversal higher, 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 tops and bottoms with sentiment indicators. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 35.5% of individual investors are bullish. This is up from last week’s 29.3% reading, but it’s still way off the 45.1% level from two weeks ago, which itself was the highest since since January 5, 2017. The long-term average is 38.5%, so a reading of 35.5% is basically neutral. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.57 on Thursday, which is well below the 0.655 long-term average. The 10-day moving average is 0.629, which is below the long-term average. Both point to bullishness. Conclusion Out of 4 sentiment indicators, we have: 2 bullish (up from 1 last week) 2 neutral (flat) 0 bearish (down from 1 last week) The permabears are still saying that everone’s all-in bullish and 100% complacent… but the numbers point to moderate bullishness. If you want to see full-on 100% 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 they were right! The Russell 2000 shook off its cobwebs, tech picked up steam, and the bears got take to the woodshed. I suspect that with a few more days of upside, sentiment could go full on psycho bullish. And that’s not out of the question. Friday’s off to a great start already, and low trading volumes (due to the holiday) could exacerbate movement to the upside.
Continue Reading -->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. Conclusion 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.
Continue Reading -->Did Rolling Stone Jinx Tesla with the Magazine Cover Indicator?
So at 10:45 a.m. yesterday, I got an email with the subject line “The Most Important Person of Our Generation.” It came from Neil Strauss, author of the infamous pick-up artist memoir The Game: Penetrating the Secret Society of Pickup Artists: I know what you’re about to ask… And I can neither confirm nor deny that I read The Game. So, to whom was Neil referring as “The Most Important Person of Our Generation.”? Tesla (TSLA) CEO Elon Musk, whom Neil just profiled for a Rolling Stone cover story: Rolling Stone covers focus on entertainers, followed by politicians and athletes. I looked at hundreds of Rolling Stone covers going back to 1990 and I found exactly one CEO cover story… and it was about an even bigger tech icon. It was the October 27, 2011 issue commemorating Apple (AAPL) founder Steve Jobs, who had died 3 weeks earlier: Even in the late 1990’s dot-com boom, there wasn’t a single tech-focused Rolling Stone cover story, let alone a CEO story. And of course, this has me thinking about the magazine cover indicator. The magazine cover indicator says that a dramatic magazine cover story (typically a major business magazine like Fortune or BusinessWeek) can be a contrary indicator. The most famous example is BusinessWeek’s The Death of Equities cover in August 1979, which preceded the biggest bull market known to man. Chart from FinancialSense.com So did Rolling Stone ‘jinx’ Tesla? And the wider world of technology of stocks? Let’s see. In Neil Strauss email, he said he “spent the last nine months in and out of his world, working on this profile…” 9 months back from November 15 is February 15. Let’s assume that Rolling Stone spent a month before slating Musk for a cover story. In January, Tesla traded between $210.96 and $258.46. It hit $389.61 in September before pulling back to $312.49 when the story hit. Here’s what the stock chart looks like: Since Tesla’s at a bit of a crossroads now, only time will tell if Rolling Stone put in the ‘jinx.’ Or maybe I should put it another way. Only time will tell if Elon Musk marked a top in his ego — and by extension his Tesla/Solar City/Space X juggernaut — by agreeing to a Rolling Stone cover in the first place. So we’ll see. But what about technology overall? We know it’s been ripping since the election. But here’s a 20-year monthly chart of the S&P Technology ETF (XLK): Let me be clear: the magazine cover indicator should not be mixed up with actual science or rational analysis. It’s mostly valuable to permabears desperate for attention on Twitter. But I can’t help but ask: wouldn’t it be funny if tech topped out just as Rolling Stone broke tradition to put Elon Musk on the cover?
Continue Reading -->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 Conclusion 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.
Continue Reading -->T3’s Market Wrap: How Do You Like Dem Apples?
Traders had two questions heading into Apple’s (AAPL) Q4 earnings report yesterday after the close: 1) Can the company produce enough iPhone X units? 2) Can the company sell enough iPhone 8 units? Apple answered both questions with an emphatic yes, proving once again that the Apple supply chain rumor mill can’t be trusted. The media does a great job of sniffing out Apple product announcements, but they’re awful at figuring out just how much product the company is selling. We’ve been hearing a lot of rumors about weak iPhone demand, and we know now that they had zero basis in reality… not that the bears would admit that. Apple reported EPS of $2.07, smashing the $1.87 consensus. Revenue was $52.6 billion, easily beating Wall Street’s $50.7 billion forecast. iPhone units were also above expectations, as was Q1 revenue guidance. Apple shares hit an all-time high at $174.26 this morning before some minor profit-taking hit. We still have to see what happens with Nvidia’s (NVDA) earnings report on Thursday, but make no mistake: tech earnings season has been nothing short of fantastic. The October nonfarm payrolls report was released on Friday, revealing that the economy added 261,000 jobs in October, missing the 310,000 Wall Street consensus. The unemployment rate was 4.1%, besting the 4.2% expected. However, the big story was Average Hourly earnings, which were unchanged. Economists expected growth of 0.2%. The numbers point to a strong labor market that isn’t generating much wage inflation. Workers are in demand, but pay just isn’t going up. The lack of wage growth means the Fed could continue to undershoot its inflation goals. The US dollar and Treasury yields fell after the numbers hit, but reversed afterwards. Gold shot up but dipped back into the red. This morning, T3 Live Chief Strategic Officer Scott Redler said that “yesterday, SPX broke below 2567 momentarily, and we now have the 2566 low as our new point of reference. As long as that holds, not much changes. We didn’t come close to that 2566 low, implying that the bull move remains fully intact. The relentless bid that keeps stock pumped in the face of a chaotic news flow is proving endlessly frustrating to the bears. Every time there’s a sign of trouble — like the recent weakness in the Russell 2000 — it quickly gets reversed and we see new headlines celebrating all-time highs. Now it seems like the only element left is time. The market’s been zooming higher and higher ever since the Presidential election. The longer time goes on, the greater probability of an unexpected shock. But betting against the likelihood of a shock has been the best trade in the market. The VIX can barely stay above 10, there’s almost no intraday movement, let alone run-of-the-mill 5% to 10% drawdowns that used to be fairly common place. So unless we get some actual technical deterioration in the charts, the only thing the bears can hope for is a shock that comes out of nowhere and destroys faith in the system. Sooner or later, something bad will happen. It always does. But good luck predicting when…
Continue Reading -->The News Is Flowing. Are Traders Happy?
We’ve got a lot of news flowing. Apple (AAPL) hit new all-time highs after delivering an incredible fourth-quarter earnings report. President Trump announced the nomination of Jerome Powell as Fed Chairman. The October nonfarm payrolls report disappointing. On a random note… has anyone heard from North Korea lately? Anyway, with stocks still hovering around all-time highs, let’s take a look at our sentiment indicators to figure out what kind of mood the crowd is in. (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish Last week, the VIX broke its shocking streak of 25 days in a row with an intraday low under 10, and it even went over 13. But as of Friday morning, it’s back down to sub-10 levels around 9.73. This gives us a 3-month spread of about +4.20, which means traders are very bullish. (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Bullish The Fear & Greed Index is at 69, which marks modest greediness on the part of investors. It hit multi-year highs at 95 4 weeks ago. 3) AAII Sentiment – Bullish The latest AAII Sentiment Survey shows that 45.1 of individual investors are bullish, up substantially from 39.6% last week. This is above the long-term average of 38.5%, so it shows bullishness. In fact, it’s 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 big change. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.63 on Thursday, below the 0.655 long-term average. The 10-day moving average is 0.635, 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 options traders were pretty optimistic heading into Apple’s Thursday afternoon earnings report and Friday’s nonfarm payrolls numbers. Conclusion Out of 4 sentiment indicators, we have: 4 bullish (up from 2 last week) 0 neutral (down from 1 last week) 0 bearish (down from 1 last week) Make no mistake, the crowd is clearly more bullish than last week. I’d guess that’s for two reasons: 1) Tech earnings season has been remarkably strong 2) The market just won’t go down Now, that may have the bears thinking we’re in danger of overheating. But keep in mind, no individual sentiment indicator is flashing extreme, full-on nutty bullishness. The crowd is positive, but it’s not irrational. If we continue to make new highs, I wonder if that AAII sentiment number will spiral even higher as individual investors turn into true believers. You may be asking yourself “how can the market get to all-time highs without a large crowd of true believers?” My answer is simple: I think an awful lot of buyers hold their noses while putting their money to work. They put money to work, but don’t necessarily feel great doing so. In fact, I keep coming back to a Gallup Poll from earlier in the year. It found that just 54% of US adults have participated in the 2009 – 2017 bull market. From 2001 – 2008, 62% of adults owned stocks. So we have to balance out bullish sentiment with the fact that many people just got up and left the table altogether. Good luck reconciling those two points…
Continue Reading -->Is the Bull Train Full? Nope!
On Friday, the Nasdaq made new all-time highs on strong earnings from megacap tech giants Amazon.com (AMZN), Intel (INTC), Alphabet (GOOGL), and Microsoft (MSFT). This spike came on the heels of what looked like the beginnings of a downtrend. On Wednesday, October 25, the SPX index made a lower low and we saw the biggest intraday range since early September. So let’s take a fresh look at our sentiment indicators to see how the crowd is feeling ahead of the weekend. (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish On Tuesday, October 24, the VIX broke its shocking streak of 25 days in a row with an intraday low under 10, and went over 13 on Wednesday for the first time since September 5. As of Friday morning, the VIX is hovering around 10.20 This gives us a 3-month spread of about +4.00, which means traders are very bullish. (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Bullish The Fear & Greed Index is at 70, which marks modest greedness on thepart of investors. It hit multi-year highs at 95 just 3 weeks ago. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 39.6% of individual investors are bullish, up slightly from 37.9% last week. This is in-line with the long-term average of 38.5%, so it’s basically neutral. 4) CBOE Equity Put-Call – Bearish The CBOE Equity-Put Call ratio was at 0.61 on Thursday, below the 0.655 long-term average as traders aggressively bought call options ahead of a big night of earnings. Those buyers certainly woke up happy on Friday! The 10-day moving average is 0.664, which is slightly above the long-term average, indicating higher-than-normal demand for put options. I would call this very slightly bearish. Conclusion Out of 4 sentiment indicators, we have: 2 bullish (flat from last week) 1 neutral (flat) 1 bearish (flat) Overall, sentiment is basically relative to last week. The mood is still moderately bullish as traders think about what’s next. Just a few weeks ago, traders seemed downright insanely bullish, though they calmed down a bit even as the indices stretched to new highs. I think we’re in a decent spot. The mood is positive, but there’s still room for folks to hop on the bull train. In particular, options traders seem like they have room to get more bullish. Thursday saw heavy demand for call options, particularly in tech names like AMZN and MSFT. But the CBOE equity put-call indicates that overall, traders have been favoring put options, possibly because they were afraid of another whoosh down from the lower low on October 25. Now the big question is whether the strength in tech will push the bulls back into bullish insanity. Earnings season as a whole hasn’t been all that great, so investors may allocate more money towards tech because that’s where the numbers have been best. The next big reports to watch are Apple (AAPL) on Thursday, November 2 and Nvidia (NVDA) on November 9. If they both beat big, maybe the bulls just keep on buying.
Continue Reading -->Are the Growling Bears About to Get Fed?
We’re closing out another week chock full of all-time highs in the major indices. On Thursday, we had a short-lived scare with futures sinking and the VIX jumping 20% in early trading. But once again, the dip buyers stepped in to stabilize things, and the SPX managed to finish in the green. That means the pain trade lives on… for now. So let’s take a look at our 4 sentiment indicators to see how traders are feeling following Thursday’s minor skirmish. (click here for a primer on the sentiment indicators below) 1) VIX Spread – Bullish Since October 6, 2014, when the CBOE changed the VIX calculation methodology, we’ve had a total of 64 days with a VIX low under 10. So these days have been occurrences… until now. With the VIX under 10 Friday, we’ve had 24 in a row! So we’re either looking at a new normal of incredibly low expectations for volatility, or the crowd has gone mad. Meanwhile, the 3-month spread is at +4.07, which means traders are very bullish. However, the VIX curve is so flat that it may be signaling extreme complacency. (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Bullish The Fear & Greed Index is at 83, marking Extreme Greed. However, it’s down substantially from the multi-year high at 95 seen two weeks ago. Still, this reading is very bullish. we’re seeing a lot of bullishness here. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 37.9% of individual investors are bullish, down slightly from 39.8% last week. This is in-line with the long-term average of 38.5%, so it’s basically neutral. 4) CBOE Equity Put-Call – Bearish The CBOE Equity-Put Call ratio was at 0.70 on Thursday, which is above the long-term average of 0.655. This indicates some skittishness following Friday’s early drop. The 10-day moving average is 0.672, which is above the long-term average, indicating higher-than-normal demand for put options. This is the highest 10-day moving average since August 24, 40 trading days ago. I would call this very slightly bearish. Conclusion Out of 4 sentiment indicators, we have: 2 bullish (flat from last week) 1 neutral (down from 2) 1 bearish (up from 0) Two weeks ago, I declared “the bulls are clearly insane. They think they’re destined to ride into the sunset on a magic carpet made of cold hard cash.” With the benefit of 20/20 hindsight, we know they were right to be insane, since the market has set multiple record high since then. However, traders have grown a bit more skittish, and bears are starting to growl. Not a lot of them, but they’re on the move. The CBOE equity put-call shows that traders are starting to pick up more put options, so some people are bracing for potential volatility. I’m starting to suspect that’s the right move. The best trade in 2017 has been short volatility, but we may be closer to the end of that game than the start. We’re had 24 straight sub-10 prints in the VIX. Implied volatility has been overshooting to the downside, and I believe it will overshoot to the upside. But of course, the most important question in financial markets is not who, what?, where, or why. It’s WHEN. Even if you can predict the future with 100% certainty, you’ve got nothing if you can’t time the trade.
Continue Reading -->