Tag Archives for " sentiment "
Why I Am Betting on a Big Spike in the VIX
Traders are too bullish. Seriously. I typically start this report by saying that “permabears always say everyone’s bullish.” They’re wrong 99% of the time. Today is that 1% of the time when they’re right. Let’s go through our 5 sentiment indicators so you can see the numbers behind my reasoning. (click here for a primer on the 5 sentiment indicators below) 1) VIX Spread – Bullish The VIX hit 9.39 early Friday, putting it awfully close to the 9.37 generational low set back on June 9. That puts the 3-month spread up to 4.57, which means traders have very little fear of volatility. This is up from last week’s 4.0 reading, and qualifies as extremely bullish. (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Bullish The Fear & Greed Index is at 76, up from 51 last week. The F&G Index operates on a 1-100 scale, and a reading of 76 qualifies as fairly greedy. This indicator has been subdued as of late, so I was a bit surprised to see it this high. 3) AAII Sentiment – Bullish The latest AAII Sentiment Survey shows that 35.5% of individual investors are bullish, up substantially from 28.2% last week. This 35.5% reading is basically inline with the 38.5% long-term average, and indicates that individual investors are basically neutral. This has been the case all year, even though the major indices have been hitting new all-time highs fairly regularly. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.53 yesterday, which is a very bullish reading The 3-day moving average is 0.57, which is well below the long-term average. These numbers indicate that traders are very, very bullish. 5) ISE Sentiment – Bullish The ISE Sentiment Index is at 138 (meaning 138 calls bought for every 100 puts. The 10 day moving average is 105 (105 calls for every 100 puts) Now that 10-day moving average of 105 is technically neutral, I’ll count it as bullish because it’s been subdued for so long. The year-to-date average is just 87, so a 10-day moving average of 105 is a big change in trend. Conclusion Out of 5 sentiment indicators, we have: 4 bullish (up from 1 last week) 1 neutral (down from 3 0 bearish (down from 1) I troll the bears constantly for spreading the outright lie that everyone’s too bullish. But again, today, the bears are 100% correct. It’s not 1999 all over again, but still — traders are extraordinarily bullish, which can sometimes (but not always) mark a top. Remember, using sentiment indicators to time the market is often a fool’s game. But it’s not often that we see so many sentiment indicators pointing in the exact same direction. There is almost no fear and no volatility out there… which means we could be about to see a spike in fear and volatility. Now, let’s be clear: I am talking my book, and I freely admit that my positioning could impact my viewpoint. Earlier this week, I went long VIX call and I own VIX bull put spreads. I am speculating on a market decline that would spike the VIX, preferably over 17 within the next few weeks. And I may even add some SPY or QQQ puts. As we all know, the theme this year has been: Equities steadily grinding higher Volatility near zero Sentiment leaning mostly neutral I think things are about to change.
Continue Reading -->Weekly Sentiment Report: Are You Afraid of the Big Bad Earnings Wolf?
Are traders afraid of earnings? That’s the question to ask following JP Morgan’s (JPM) kick-off of second-quarter earnings season. Last week, traders were in a pretty happy mood despite a pickup in volatility, particularly in tech stocks. Active traders are enjoying the back-and-forth action, because it’s bringing in more opportunities. But let’s take a deeper look at market psychology to see how fear is in the market ahead of a pivotal earnings season. So let’s take a look out our 5 sentiment indicators to see just how bearish traders are after yesterday’s volatility spike. (click here for a primer on the 5 sentiment indicators below) 1) VIX Spread – Bullish The VIX broke under 10 today in the aftermath of the weak retail sales and CPI numbers, which presumably support and accomadative Fed policy. That puts the 3-month spread up to 4.0, which means traders have very little fear of volatility. This is up from last week’s 2.8 reading. (click here for a primer on the VIX spread) 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 51, up from 44 last week. The F&G Index operates on a 1-100 scale, and a reading of 51 is right smack in the middle. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that just 28.2% of individual investors are bullish, down slightly from 29.6% last week. This 29.6% reading is well below the 38.5% long-term average, and indicates that individual investors still don’t trusth the market. This has been the trend all year, even when the SPX was hitting record highs with basically no volatility. In fact, despite the market’s stunning resilience since the election, the average bullish reading this year is just 33.3%. Since so many traders make comparisons to 2007, let’s take a look at the averages back then. From the start of 2007 to July 12, 2007, the average was 41.6%. That’s a huge difference. 4) CBOE Equity Put-Call – Neutral The CBOE Equity-Put Call ratio was at 0.62 yesterday, which is a slightly bullish reading The 3-day moving average is 0.64, which is right in-line with the long-term average. These numbers indicate that traders are modestly bullish. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 85 (85 calls bought for every 100 puts. The 10 day moving average is 101.6 (101.6 calls for every 100 puts) This indicates that traders are neutral. Conclusion Out of 5 sentiment indicators, we have: 1 bullish (down from 2 last week) 3 neutral (up from 2) 1 bearish (flat) We’re seeing a tad less bullishness relative to last week. The market’s had a pretty nice little move off the June lows, with decent strength in biotechs and small caps. But it looks like traders aren’t quite ready to put the pedal to the metal as we start to move into the heart of earnings season. Netflix‘ (NFLX) report on Monday could indeed be pivotal since the reaction will tell us how the market may treat other tech sector reports.
Continue Reading -->Weekly Sentiment Report: Fear Is Here!
Last week, I asked if the bulls went too far. Options traders were buying call options like crazy, betting on a big pop into quarter-end. Turns out, the only thing that popped was the VIX, which rose 56% intraday yesterday, its 5th largest range ever. Take a look at this chart: So let’s take a look out our 5 sentiment indicators to see just how bearish traders are after yesterday’s volatility spike. (click here for a primer on the 5 sentiment indicators below) 1) VIX Spread – Bullish This VIX rose so fast yesterday that the curve actually inverted for a short period, indicating extreme fear. But less than 24 hours later, the VIX is around 11ish and the 3-month spread has reinflated back to +2.75. So everyone that bought puts yesterday to bet on a further decline today is getting spanked. 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 53, flat from last week. F&G operates on a 1-100 scale, and a reading of 53 is right smack in the middle. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that just 29.7% of individual investors are bullish, dowm from 32.7% last week. This 29.7% reading is well below the 38.5% long-term average, and indicates that individual investors are fearful. Throughout this year, individual investors have tended to not trust the market, and this latest reading indicates that nothing’s changed. On a related note, two weeks ago, I compared 2017 AAII numbers to those back at the 2007 market top. Individual investors were downright loony in October 2007, not the least bit worried about the deteriorating housing market. They’ve been much more skittish in 2017 even though we’ve had almost no volatility this year. 4) CBOE Equity Put-Call – Bearish The CBOE Equity-Put Call ratio was at 0.69 yesterday, which is a bearish reading. The 3-day moving average is 0.66, which is slightly above the long-term average. These numbers indicate that traders are modestly bearish. 5) ISE Sentiment – Bearish The ISE Sentiment Index is at 90 (90 calls bought for every 100 puts. The 10 day moving average is just 81.5 (81.5 calls for every 100 puts) This indicates that traders are bearish. Conclusion Out of 5 sentiment indicators, we have: 1 bullish (down from 2) 1 neutral (down from 2) 3 bearish (up from 1) Clearly, traders are more bearish than last week. So we’re seeing the same old trend — every time the market hits the rocks, traders get real real bearish real real fast. I know it’s trendy to say that everyone’s bullish, but that’s just plain wrong. If you want to see what real bullish sentiment looks like, go back to 2007. As I noted earlier, we’ve seen very little volatility this year. So the fear isn’t coming from troubling price action. The problem seems to be two-fold: 1) People are fixated on Washington DC headlines and assume that political volatility will lead to a down market 2) The bull market’s gone on for so long that people assume it just has to hit the wall — what goes up must come down The bears will be right eventually, but who knows when? Jeff Cooper is making a very good case for further downside, so I suggest you read his latest piece: These Rallies Were Made for Selling
Continue Reading -->Weekly Sentiment Report: Did the Bulls Just Go Too Far?
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, we saw a rapid increase in bearishness. The moment the Nasdaq started looking shaky, traders started scooping up put options in advance of a larger fall. But in keeping with the big 2017 trend — that every dip turns out to be buyable — the market steadied itself, largely on the back of a big bounce in biotech this week. So with the Nasdaq crawling out of its hole, let’s take a fresh look at our 5 sentiment indicators. (click here for a primer on the 5 sentiment indicators below) 1) VIX Spread – Bullish The VIX has dropped a bit to 10.10, which keeps it within range of generational lows. The 3-month curve is at +3.63, which indicates traders are moderarely bullish. This is roughly the same as last week. 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 53, up just a bit from 52 last week. F&G operates on a 1-100 scale, and a reading of 53 is neutral. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 32.7% of individual investors are bullish, up slightly from last week. This 32.7% reading is below the 38.5% long-term average, and indicates that individual investors are basically neutral. Throughout this year, individual investors have tended to not trust the market that much, and this indicates nothing’s changed. On a related note, earlier this week, I compared 2017 AAII numbers to those back at the 2007 market top. Individual investors were downright loony in October 2007, not the least bit worried about the deteriorating housing market. Today, they’re much more skittish. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.50 yesterday. As Marc Eckelberry posted earlier, this is a 6-month low. The 3-day moving average is just 0.60. These numbers are below historical norms and indicates that traders are bullish. This is a big turnaround from last week. 5) ISE Sentiment – Bearish The ISE Sentiment Index is at 100, indicating equal demand for calls and puts. However, the 10 day moving average is just 74.2 (74 calls for every 100 puts) This indicates that traders are bearish. Conclusion Out of 5 sentiment indicators, we have: 2 bullish (up from 1) 2 neutral (unchanged) 1 bearish (down from 2) Clearly, traders are more bullish than last week. They’re not “all in” but the mood has gotten much happier. In particular, it seems that options traders are betting on a big pop into quarter-end. That rock-bottom 0.5 reading in the CBOE equity put-call is a sign of complacency — though that’s not confirmed by the other indicators. If the 3-month VIX spread was near +5, I’d actually advocate shorting, or going long something like VXX. That would mean traders saw almost no risk ahead, essentially setting themselves up for a fall. Near-term, I’d watch to see if biotech can continue powering higher. If IBB can keep on trucking into the stratosphere, maybe the bulls will finally take things too far.
Continue Reading -->Are Traders More Bearish Today Than in 2007?
Quick Summary It’s trendy to say that everyone’s bullish. But the evidence shows that many investors don’t trust the market. A lot of investors left the market altogether! ******** Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. That’s how I open T3 Live’s Weekly Sentiment Reports. And it’s very rare that the “permas” back up their opinions with real data. So I do my best to supply you with numbers that can help us figure out how the crowd’s actually feeling. Obviously, traders want to know if this is the year the market tops out. So they’ll look for parallels to 2007, when the market peaked ahead of the financial crisis. I’m obsessed with sentiment data, so we’re going to take a deep dive into the numbers to figure out: How bullish traders were at the 2007 SPX top, and how that compares to the present Major warning signs ahead of the 2007 market peak, and whether we’re seeing them again today Background on 2007 Before the financial crisis hit, the SPX hit a record high of 1576.09 on October 11, 2007. That put the index was up 11% on the year, excluding dividends. Now, people had been debating the health of housing for years. Former Fed chairs Ben Bernanke and Alan Greenspan weren’t worried about a bubble. But Forbes Magazine actually asked the question ‘What If Housing Crashed?’ back in 2001. And in 2005, Berkshire Hathaway’s Warren Buffett and Charles Munger warned about some areas of housing getting bubbly. How Did Traders Feel in 2007? Traders were very complacent at the October 2007 top. The housing bubble was a subject of constant debate by then, but individual investors as a whole weren’t concerned. They thought we could survive the storm. On October 11, 2007, the American Association of Individual Investors survey indicated that 54.6% of investors were bullish — well above the long-term 38.3% average. That was the highest level since January 17, 2007. The 8-week moving average (a good estimate of the trend) was 44.4%. The average year-to-date at that point was 42.4%. Now let’s see how that compares to readings from last week, just ahead of Monday’s new all-time highs in the SPX and Nasdaq. Last week, just 32.3% of investors were bullish, with an 8-week moving average of just 32.5%. Year-to-date in 2017, the average is just 33.6%. So by this measure, individual investors are not nearly as bullish as they were in 2007. Here’s a chart so you can see the difference between 2007 and today: Clearly, individual investors are nowhere near as confident as they were in 2007. What About Options Traders? I then took a look at the CBOE equity put-call ratio. The long-term average of 0.655 hasn’t changed much since October 1, 2006, which is when my data set begins. So this is a very stable indicator to use. Around the October 11, 2017, however, there was a bit of a lull. On October 15, the 10-day moving average fell to just 0.568, a 3-month low. In 2017, we have not had a single 10-day moving average that low. The last such reading was on December 19, 2016. This isn’t as clear-cut a comparison as the AAII example, but it points to less complacency today. The Gallup Poll A recent Gallup poll showed that just 54% of US adults have owned stocks during the 2009-2017 bull market. But from 2001 – 2008, 62% of adults owned stocks. In fact, the only group of Americans that have maintained stock ownership has been those earning over $100,000 per year. Many of the masses have left. Conclusion It’s trendy to say that everyone’s bullish. But the evidence shows that many investors don’t trust the market. In fact, the Gallup data indicates that a lot of folks just got up from the table altogether. This is good news for the bulls. Why? Because tops tend to happen when everyone’s in. This bull may have some more room to run…
Continue Reading -->Weekly Sentiment Report: With Record Highs All Around, Are the Bulls Out of Control?
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, we definitely saw a bull party starting, with the VIX dropping back towards the 9.56 generational low set from May 9. And after I wrote that, the VIX made an even lower low at 9.37 while the SPX, Nasdaq, Russell, and Dow all hit record highs. The VIX hasn’t been so low since December 1993. While I always love talking sentiment, this latest market pop makes now the perfect time for an update on the market’s mood, especially since we justed passed this week’s big news trifecta — Comey’s testimony, the UK election, and the ECB Meeting. (click here for a primer on the 5 sentiment indicators below) 1) VIX Spread – Bullish Obviously, the VIX is pretty much as low as it gets. The 3-month curve is at +4.93, which means traders are extremely bullish. Readings near 5 are most definitely in froth territory. 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 59, up from 56 last week. F&G operates on a 1-100 scale, and a reading of 59 is neutral. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 35.4% of individual investors are bullish, up from 32.9% last week. This 32.9% reading is below the 38.5% long-term average, and indicates that individual investors are basically neutral. The 8-week moving average for bullishness is just 31.7%. At the start of the year, that 8-week moving average was 45.6%. So even though the markets have been going straight up, individual investors have grown less and less trusting. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.55 yesterday with a 3-day moving average of 0.57. These numbers are under historical norms, indicating that traders are heavily leaning towards call options. This indicates high bullishness. 5) ISE Sentiment – Bearish The ISE Sentiment Index is at 77 this morning (77 calls bought for every 100 puts). The 10 day moving average is 83.7. The ISE has been steadily declining for the past couple of weeks — a bit of a surprise given the market’s stability. Conclusion Out of 5 sentiment indicators, we have: 2 bullish 2 neutral 1 bearish These numbers are unchanged from last week. However, we are definitely approaching frothy territory, based upon the huge collapse in the VIX and the drop in the CBOE equity put-call ratio. The doomsday crowd has been consistently saying the crowd is too bullish — even though they never have numbers to back those views up. That said, they’re close to being right. The AAII sentiment number indicates that individual investors haven’t quite bought into the bull case, even though volatility has disappeared as the market keeps grinding up. Next, I want to repeat some data I posted last week: A recent Gallup poll showed that just 54% of US adults have participated in the 2009-2017 bull market. From 2001 – 2008, 62% of adults owned stocks. Before the financial crisis, as many as 65% adults owned stock. That means a huge number of people have missed out on a 267% move in the stock market. On Thursday, Scott Redler talked about the biggest risk of all — the risk of missing out on wealth creation via smart long-term investing. And it’s crazy that even now, with the market more than tripling and going straight up since the election, there are still a lot of folks that don’t believe. Scott set a target of 2470 by June 30, and that scenario looks more and more likely. Now if that AAII sentiment number was at 45%, I’d probably be looking at SPY puts or VIX calls. But for now, it looks like the bulls still have the ball.
Continue Reading -->Weekly Sentiment Update: The F.O.M.O. Train Is Unstoppable… for Now
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, we saw traders show less more fear after the SPX broke to new all-time highs. And the question I asked was whether we were set for a F.O.M.O.-driven ride up to SPX 2500. With markets still clawing higher, it looks like the answer is yes. So let’s take a fresh look at our 5 primary sentiment indicators to see if the ride towards 2500 has made the bulls overconfident. (click here for a primer on them) 1) VIX Spread – Bullish The VIX dropped as low as 9.65 Friday, putting it within range of the the 9.56 generational low on May 9. A couple of weeks ago, the VIX curve nearly inverted, but the 3-month curve is at +3.7, indicating traders are not pricing in much near-term volatility. Or in plain English, folks are bullish. 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 59, up from 56 last week. F&G operates on a 1-100 scale, and a reading of 59 is pretty much neutral. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 26.9% of individual investors are bullish. This 26.9% reading is well below the 38.5% long-term average, and implies that individual investors do not trust this bull move. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.66 yesterday with a 3-day moving average of 0.66. This is above historical averages. 5) ISE Sentiment – Neutral The ISE Sentiment Index was at 84 Friday afternoon (84 calls bought for every 100 puts). The 10 day moving average is 89.3. These numbers show higher put demand, but they’re actually in-line with recent averages, so I’ll also lump it in as neutral again. Conclusion Out of 5 sentiment indicators, we have: 2 bullish 2 neutral 1 bearish So these numbers are unchanged from last week. The question to ask is whether we’re on the verge of outright forth. Last week, I said no. This week… I’m saying maybe. The AAII Sentiment Survey indicates that individual investors are pretty skittish. Typically, at tops, you see the masses wanting to get in. One possibility is that the tense geopolitical climate is preventing investors from getting too bullish, even though volatility has gone to basically nothing since the election. And the CBOE equity-put call doesn’t show rampant demand for call options, another thing we typically see at market tops. Therefore, I think there’s a reasonable chance we charge past SPX 2500 in the next couple of weeks as shorts throw the towel in, unable to withstand the bulls’ painfully slow push higher. And at that point, perhaps crossing a major round number like 2500 really gets the bulls overconfident, setting the stage for a drop. But for now, let the relentless post-election bid teach you an important lesson: the trend is your friend. And it can be your friend for a lot longer than may seem reasonable. So if you want to bet against it, have a really good reason. I’ll end with a tip: if you’re reason is “what goes up must come down,” go back to the drawing board!
Continue Reading -->Weekly Sentiment Update: The Bulls Come Out to Play
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, sentiment was very bearish, and I said “I think SPX makes new all-time highs above 2401 by Monday at 9:45 a.m. ET.” And indeed, in the aftermath of Emmanual Macron’s victory in France, the SPX did indeed squeeze to a new record high at 2401.36 at 9:35 a.m. ET. That was followed by another all-time high on Tuesday at 2403.87 before the market fell back into the range. So let’s take a fresh look at sentiment and figure out whether the bears are still growling. (click here for a primer on these 5 sentiment indicators) 1) VIX Spread – Bullish The VIX is at 10.70 this morning after hitting new 10-year lows earlier in the week. The 3-month spread is at 3.7, which means that traders are moderately bullish. 2) CNN Fear & Greed Index – Bullish The Fear & Greed Index is at 63. F&G operates on a 1-100 scale, and a reading of 63 means traders are moderatly bullish. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 32.7% of individual investors are bullish, down from 38.1% last week. This is below the long-term average of 38.5%. 4) CBOE Equity Put-Call – Neutral The CBOE Equity-Put Call ratio was at 0.65 yesterday with a 3-day moving average of 0.63. This indicates that traders are neutral. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 97 as of late morning (97 calls bought for every 100 puts). The 10 day moving average is 87.6. So the recent trend shows higher put option demand. However, I’ll consider this number neutral because it’s actually risen a bit in the past couple of weeks. Conclusion Out of 5 sentiment indicators, we have: 2 Bullish (up from 1 last week) 2 Neutral (unchanged from last week 1 Bearish (down from 2 last week Traders looked pretty negative last week ahead of the April jobs numbers and the French election results, but they’ve swung to moderately bullish this week. Looking forward, we’ll probably need a meaningful surge above the new 2403.87 record high to push the market into full-on froth category. But to be fair, for 2 reasons, it could be argued that froth already set in: 1) The VIX hit 9.56 earlier this week the lowest level since February 2007 2) There’s just no volatility because the shallowest of dips keep getting bought But let’s play it by ear. Low-volatility stretches can go on for a long time before anything changes.
Continue Reading -->Weekly Sentiment Update: Why the Bears May Fuel New All-Time Highs
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, the overall mood of traders shifted to neutral from the prior week’s extreme bearishness. With the healthcare vote, earnings from AAPL/AMZN/FB/TSLA, and the April nonfarm payrolls report out of the way, let’s see how traders are feeling ahead of this weekend’s French election. (click here for a primer on these 5 sentiment indicators) 1) VIX Spread: Bullish The VIX dropped under 10 this morning, and the 3-month spread is at +3.98. This means that traders are fairly bullish. 2) CNN Fear & Greed Index: Neutral The Fear & Greed Index is at 45, down from 48 last week. F&G operates on a 1-100 scale, and a reading of 45 means traders are neutral. 3) AAII Sentiment: Neutral The latest AAII Sentiment Survey shows that 38.1% of individual investors are bullish,basically unchanged from last week. This is right in-line with the long-term average of 38.5%. 4) CBOE Equity Put-Call: Bearish The CBOE Equity-Put Call ratio was at 0.77 yesterday with a 3-day moving average of 0.69. This indicates that traders are bearish. 5) ISE Sentiment: Bearish The ISE Sentiment Index is at 65 as of the Thursday close (65 calls bought for every 100 puts). The 10 day moving average is just 88.2. So the recent trend shows higher put option demand. The big drop ahead of Friday’s NFP report has me slotting this number in at bearish. Conclusion Out of 5 sentiment indicators, we have: 1 bullish 2 neutral 2 bearish So traders have gotten more negative since last week, when we had 1 bullish, 4 neutral, and 0 bearish sentiment indicators. Last week, I wondered whether sentiment was about to go full-on bullish, but we saw precisely the opposite occur. Traders actually got more bearish, which is vert encouraging for the bulls. Judging by yesterday’s surge in put option demand (as indicated by the CBOE equity put-call ratio and the ISE Sentiment Index), traders were hedging aggressively for today’s NFP report and this weekend’s French election. This means there’s a lot of bearish bets that will need to be unwound in a jiffy if we get a Macron victory in France. I don’t think Marine Le Pen can be counted out until the final vote is tallied, but it certainly looks like Macron is in the driver’s seat. Call me crazy, but I think SPX makes new all-time highs above 2401 by Monday at 9:45 a.m. ET. (not that 8 points is a meaningful move in the grand scheme of things…)
Continue Reading -->5 Sentiment Indicators You Need to Know About
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. Most of the time, neither actually gives evidence for their views. That’s why we started T3 Live’s Weekly Sentiment Update. Our Weekly Sentiment Update eliminates opinions, feelings, hunches, and preconceived notions. That lets us strictly focus on the numbers and get a more accurate idea of just how bullish the crowd is. To do this, we take 5 sentiment indicators, break each one down, and then analyze what they mean as a whole. Why 5? Simple — lone sentiment indicators contradict each other all the time. At any given time, one sentiment indicator can read bullish, and another can read bearish. So it’s best to use a variety before forming an opinion. And the 5 we use are all available to the general public without any expensive subscriptions. Here they are, in no particular order: 1) VIX Curve If you understand the basics of the VIX, then you probably know that the VIX alone is useless as a sentiment indicator. And it has little value as a predictor of price. However, by comparing the spot price of the VIX to forward futures prices, you can get an idea of just how much volatility traders are pricing in. For example, if the spot VIX price today is 20 and the 3-month future is 18, that means that traders are pricing in significant short-term volatility. That of course means they’re bearish. Click here for a detailed primer on the VIX Curve 2) CNN Fear & Greed Index The CNN Fear & Greed Index uses a variety of factors including market momentum, junk bond demand, and market volatility to judge whether traders are more fearful (bearish) or greedy (bullish). I’m a big fan of this index because it operates on a simple 0 (extreme fear) to 100 (extreme greed) scale, which eliminates a lot of guesswork. If you’re going to choose only 1 sentiment indicator to follow (which I don’t recommend), this is probably the one to pick because it focuses on actual market activity than polls and surveys. 3) American Association of Individual Investors Sentiment Survey Speaking of surveys, every Thursday, I look forward to the release of the AAII Sentiment Survey. The AAII Sentiment Survey tells us whether individual investors are bullish, bearish, or neutral for the next 6 months. Since individual investors tend to get too bullish at tops and too bearish at bottoms, it’s good to know where they stand. AAII also provides in-depth commentary with its weekly Sentiment Survey data, which is very helpful in making comparisons to historical trends, and in figuring out what’s actually driving public opinion on the market. 4) Chicago Board Options Exchange Equity Put-Call Ratio The CBOE Equity Equity Put-Call Ratio tells us how many put options are traded vs. the number of calls. Reported at the end of each day, the CBOE equity-put call gives us a rough idea of how equity options traders view the market. On average, about 0.65 puts trade for each 1 call every day. When we see major shifts from that long-term average, it can indicate an extreme in sentiment, and a potential trend change in the market. 5) ISE Sentiment Index The ISE Sentiment Index is similar to the CBOE Put-Call ratio, but it has a few interesting twists to it. While many options-derived sentiment indicators are put-call ratios, the ISE Sentiment Index is actually a call-put ratio. The ISE also uses only opening long customer transactions, and eliminates market maker and firm trades. This discards many trades that are not clear bullish or bearish bets from sentiment calculations. For example, shorting puts is actually a bullish trade, and market makers may trade calls and puts strictly to hedge other transactions they make. The ISE also operates on a scale of 100, with 100 representing equal demand for calls and puts. And unlike the CBOE Equity Put-Call, the ISE is reported every 20 minutes on a slight delay. But bizarrely, even tough the ISE Sentiment Index seems better designed, since late December, I’ve found the CBOE Equity Put-Call Ratio more helpful. How You Can You Use Sentiment Indicators in Your Trading Typically, it’s better to buy when sentiment is very bearish, and it’s better to sell when sentiment is very bullish. But you must keep a few things in mind. First, analyzing sentiment is more art than science. Yes, we’re dealing with numbers, but I can tell you from experience that trying to turn them into buy or sell signals through quantitative analysis is extraordinarily difficult. Plus, extremes in sentiment can last quite a long time. For example, as of April 2017, the ISE Sentiment Index has been bearish for months and months. So don’t use sentiment indicators as buy or sell signals on their own. Just treat them as another piece of the puzzle, and incorporate them into your overall market and trend analysis. Let’s take the April 23 French election. After analyzing the 5 sentiment indicators listed above, I determined that traders were very bearish ahead of the news. Traders were clearly pricing in a negative outcome (namely, a victory by far-right populist Marine Le Pen). So if I had wanted to bet on a positive outcome, I would have been encouraged by the bearish sentiment. Why? Because when traders are very negative, positive news can drive huge rallies, which is exactly what we saw on April 24.
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