Why is sentiment complacent but not giddy? Simple: It's because we're not "all in," yet few of us think we we can get much downside. Let me show you in two charts.
Giddy is when the bulls are so bullish they can't see any obstacles in the way. Thus, the expression "all in" comes to mind. When the Investors Intelligence Bulls go over 60%, that's getting giddy. On Thursday, we saw this week's American Association of Individual Investors' weekly survey, which showed something similar.
I should stop here and note that my view on AAII is that they tend to jump around like a bunch of day traders, so unless it's confirmed by other indicators, it's often just noisy. But on this chart of the AAII bulls, you can see that reading just shy of 60% the first week of January 2018 (green arrow). That was giddy. They weren't so giddy in October, but you can see the red arrow shows a jump to a multi-month high in bulls. As a reminder, in early October the Investors Intelligence bulls were 60%, so I consider that a confirmation.
With this week's reading at 35%, down from 40%, I simply cannot call this giddy. It has been between 30% and 40% since January. There is nothing terribly extreme about the bulls here.
So why do I say we have complacency? Take a look at the bears. They are now at 20%. The Investors Intelligence Bears are at 18%. When so few are fretting over the downside, that's complacent. To show you how I look at it, the four-week moving average of the bears was 48% at the December lows -- that's fear -- and now the four-week moving average is at 23%. So I'm smoothing it out to see how persistent the complacency is. Notice that even off the 2016 low, we never saw the four-week moving average of bears get this low. They got this low in January 2018, two years after the big market low.
That's why I call sentiment complacent: So few think we can get much downside, but they are not really "all in."
This is one reason we get this churning and weakness underneath in the market. When everyone is all in, it's easier for stocks to go down all together. When there is still "room," they just simply pile into a narrowing group of stocks that are working.
That's why we get breadth weak as we have. In the last eight trading days, breadth has been red five days, and positive only three. One of those positive days it was +20, which is not much. We have also seen the number of stocks making new lows expand. The 10-day moving average is now challenging the peak reading we saw in late March.
Either that works itself out over time or it eventually weighs too heavily on the market, and the indexes come down, too. All I know is the majority of stocks have been sloppy for a few weeks now.