Often I feel I have a pretty good handle on sentiment. It's rare when what you hear anecdotally disagrees with what you see in the indicators. Yet, that seems to be the case in the market these days. I have explained it as part of the Either/Or Market.
The S&P 500 seems to levitate with fewer and fewer stocks helping it out. Just witness Thursday and Friday last week when the S&P tacked on 20 points in total and breadth was negative both days. So, essentially the big cap index goes up and the majority of stocks go down.
I think that has created this divergence. Those folks who play the index think everything is fine and dandy and complacency is high. In fact, I heard no fewer than five times on Friday that folks expect the index to continue to grind higher.
Yet it seems those who trade individual stocks have a different view. The 30-day moving average of the equity put/call ratio is now at the highest level it has been in over a year. Oh, it is not very high overall, but it spent 10 years in a range. Then last summer, it dropped out and, until this past week, has not come back into that range.
So, either all the speculating in call options has drifted away and we are heading back into the range or folks have begun to buy puts on individual equities because the ratio rises when there are more puts than calls traded. Either way, all that bullishness that we saw for the last year seems to be getting wrung out. When individual stocks are not working, folks give up on it. I'd call it the equivalent from the old days of not opening your monthly brokerage statement when it arrives in the mail.
Yet, we also see it on the Index put/call ratio. Here I use a 21-day moving average - a 30 day moving average looks very similar. This one is fascinating because it is fast approaching the highs it saw in late October 2020, as stocks were making lows just prior to the election. You can see it on the chart. That high from last fall (Point C) is similar to Points A and B. Point A was the summer of 2010, in the post Flash Crash environment, and Point B is in October 2011 after U.S. debt was downgraded that summer.
In all three prior cases, the S&P was well off its highs, not pushing up against the upper end of a channel that has been in place since the spring.
Now there is one more twist in this plot. My weekly Twitter poll showed a mere 48% looking for upside in the S&P this week. That has often been enough for the market to rally. Not always, but often. I also decided to run a poll on the Russell 2000, which showed folks are even more bearish there with 44% looking for upside and 56% for downside.
I will therefore note that a whack in the market will make most of these sentiment indicators get too bearish in a hurry.