We're going to talk about sentiment, because I think it is becoming important again.
Earlier this week, after Monday's rally, I noted that the put/call ratio was still relatively high at .80. Yet, the anecdotal chatter I saw was that everyone shrugged at last week's pullback. That changed on Wednesday. Now the put/call ratio is back to .70, so instead of just chatter, we have actual action where folks are putting their money where their mouths are.
Then there is the Investors Intelligence survey. It is tallied up on the weekend prior to release. I thought for sure we'd see bulls pull in their horns and bears lift a bit. But I was very wrong on that. Bulls lifted a bit and bears got so low at 15.8% that I had to go all the way back to the first quarter of 2018 to find the bears this low.
Here's a chart of the S&P in the first half of 2018. Point A shows the lowest reading for that cycle for bears at 12.2%. We got another two weeks of rallying and then Volmageddon showed up. That was when the Volatility Index exchange-traded fund products blew up.
In mid-March, as we were climbing out of the slog, bears slipped at 15.7%, having gone up after the big February decline, and down we went. That's "Point B" on the chart. The good news about the March pullback was that it was a nice retest of the February low.
The bottom line from this survey is that complacency is alive and well considering last week didn't even shake 'em.
Then there is the Daily Sentiment Index (DSI). Nasdaq is now at 85, which is the highest reading we've seen since mid-April, when it was 89. That's the blue arrow on the chart. Prior to that, we had multiple readings over 90 in January, before that late month whack. For me, readings over 85 are yellow flags in that it means be on the alert. Readings over 90 are red flags.
Couple that with the fact that the daily sentiment for the VIX is now at 15. I view a reading of 15 as I do a reading of 85: Be on the alert. If it goes to single digits, it means you should absolutely expect volatility.
It has been my contention that we will not get overbought until just after the quarter ends, in early July, so I would like to see the market pull back a bit in the next few days to get these DSIs out of the yellow zone and that would give them some more runway into the end of the quarter. That way the DSI readings could get extreme, as we're getting overbought. Let's see if that scenario develops, because right now the complacency level is high.
