I have been waiting for the Investors Intelligence Bulls to scoot themselves over 55%, as a sign that things are getting a bit frothy. Well, this week they chimed in at 54.9%. So close.
Let me reiterate that nothing's special about moving over 55%, except that it's what I call the last stage of acceptance of the rally. So once they go over 55%, they usually go to 60% in a hurry. Over 60% is what takes us to an extreme in sentiment.
Yet, today I am here to report two serious extremes in the put/call ratio readings on Tuesday. First, Tuesday was essentially the inverse of Monday. Monday we opened down and clawed our way back, but on Tuesday we opened up and clawed our way down, keeping the days of churn alive. This means most of the indicators have barely budged in two days.
As for the extremes, let's start with the put/call ratio for the Volatility Index, or VIX, where someone has clearly decided to bet heavily on more downside for the VIX, since the put/call ratio for the VIX was a high reading of 149%. Remember, a high put/call ratio for stocks, indexes or exchange-traded funds is often bullish for stocks, because it means too many puts being bought relative to calls. This means the contrarian believes the market would rally to prove the options buyers wrong.
A high put/call ratio for the index means too many bets on a lower VIX -- with the index at about $12. Look at the last 18 months, where this reading was so high. There were exactly three such readings, and they are the blue arrows on the chart. In June of 2018, there were two readings a day apart, thus the one arrow.
Now let's talk about the put/call ratio for exchange-traded funds, since that sunk like a stone to 59%. It doesn't get that low often. See the chart above in red. In January 2018 and early December 2018, the low readings were a few days before the peak in stocks. In December 2017 (farthest arrow on the left), we saw a sideways move before a huge upside blow-off. You can decide if you think this is December 2017.
Away from the stock market sentiment bonds had a big day and the yield on the 5-year Treasury note tagged 2.40%, which is the bottom of my first target zone. I think it is going to be more of a struggle for yields now to make big progress as they chew through resistance.
If the Utes -- the Dow Jones Utility Index -- can break under 770 perhaps bonds will get those yields higher.