Friday Market Sentiment
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The sentiment surveys, the put/call ratios and the VIX are providing mixed signals. Also, stocks are generally short-term overbought by a number of technical measures. Caution is warranted towards the market.
A look at investor sentiment is shown below in a diagram of four investor surveys.
The individual investor survey shifted higher by quite a bit this week, and the bloggers shifted a tiny bit higher. Individuals are fickle and undecided lately about this market as their sentiment shifts up and down, but they have generally tended towards the skeptical side for a number of months and this has been favorable for stocks from a contrarian sentiment view point. The bloggers are always skeptical of the market it seems, and I would really love to know why since they are a well informed group. Regardless of why they insist on being on the wrong side of the market, their skepticism is also favorable towards the equities from a contrarian sentiment point of view.
The newsletter survey is less volatile than the others and more important. It is higher this week and approaching the red, overbought level signaling a level of bullishness not seen in the newsletter writers in a while... since early January I think. So looking at this survey as a contrarian, the newsletter bullishness is at a level that is starting to work against equities.
The survey information above can be obtained for free via the following sites. Investor's Intelligence is from Market Haromics. Individual Investors and Market Vane are from Investment Tools. Blogger Investors is from Ticker Sense.
Regarding Market Vane, this is a survey of futures commodity advisors and is used by futures traders. The publisher states that it is best used as an indication of the current short-term trend, with the idea that investments in futures should be in line with the trend. So this survey has to be viewed separately from the others. For additional information about market sentiment, I recommend a blog by Brent Leonard.
Sentiment analysis is an important component when following the markets, and is considered a “contrary” indicator. Contrary because if too many people are bearish then there aren't enough sellers left, the balance tips to buyers, and the market starts to advance. If too many people are bullish, most funds are already invested, the balance tips to sellers and the market weakens. One way to determine if investors are bearish or bullish is by taking surveys and tracking at what levels these polls indicate investors are at the extremes of bearish or bullish sentiment.
Keep in mind, sentiment analysis is not a science and only provides very general information. Sentiment is not a signal to take action, but provides background about the current state of the markets. For instance, there have been many occasions when bullishness reached high levels well before the market started to weaken.
The 10-day moving average of the equity put/call ratio has moved substantially lower from its peak in March. It is currently at a level where it is displaying some confidence towards the market, although not excessive. So it is at a tough level to read, but I think caution is called for at this point.
Checking in weekly with the VIX and where it is in relation to the market. The VIX is currently trending down while the market advances which is a healthy sign. However, the SPX is hitting new highs while the VIX is a distance above its prior lows, so this looks like a negative divergence. For a much more thorough analysis, check out VIX and More.
I'm trying to come with another way to view the put/call in relation to the market. Below I show the 20-day and 60-day moving averages of the equities-only and total put/call ratios, with the S&P 500 index in the middle. I think this helps show the relationship of the highs and lows of the put/call to the equity index. The CPC peaks certainly have been opportunities in the past, but the lows are a unclear. I'm not sure exactly what the current levels of the put/call are indicating though.
