Despite my view that price changes sentiment, I am now - and forever will be - surprised at how fast it does so.
A week ago we saw the American Association of Individual Investors bulls fall to their lowest level since December, and we saw the bears shoot up as well. OK, those folks jump around like a bunch of day traders, so maybe I should not be terribly surprised. But the extent to which they shifted surprised me.
Then there's the put/call ratio. I have been harping away at that statistic for over a week now. First it shot up to 128% on May 9, the highest reading since December. Then, it spent nine of the last 10 trading days over 100%. That was after failing to reach that high over almost the entire month of April, and it was the longest time spent over 100% since the December decline. These recent readings served to send the 10-day moving average screaming higher, which is ultimately bullish when it peaks and rolls over.
Last Friday we saw the put/call ratio for equities shoot up to 81%, which was the highest reading since December. We could rationalize the move by saying it was a Friday and folks didn't want the weekend risk. But then came Tuesday's rally and the equity put/call ratio sank to 57%, the lowest since May 3. Did folks turn bullish that quickly? Wow.
One final note on sentiment that's a bit bothersome to me: the Volatility Index put/call ratio has soared to 120%. Why are so many people betting on a lower VIX from here? Usually that means we can expect more volatility in the days ahead.
We have had three high readings in the last month. The first arrived mid-April; you can see on the chart that was the day before the VIX made its low and began that move from 12 to 23. The next one was better-timed, but not great in that the VIX shot up to the high of 23-plus the very next day before heading down. And finally, two days after that the VIX closed at 16 and the very next day found it back at 21.
None of this is dire. The reading that was most problematic was the one that showed up in mid-April, after a long drought of no one betting on a lower VIX. But VIX readings like this probably mean we should get a bout of volatility in the coming days.
Away from that, we had the best breadth day in the market (by a small margin) since March 11. It was not enough to turn the McClellan Summation Index back up. That would require one more positive breadth day. So we remain where we've been, with the market not yet overbought, but showing some signs of improvement here and there.