Call Me Sentimental

Many years ago, I wrote about developing a proprietary sentiment index which I have been updating religiously week upon week since well before the 2008-2009 financial crisis. This sentiment indicator is considerably different than some of the casual ones some talk about. This sentiment index reflects the views across a very wide swath of market participants of which the AAII is only a small sub-group. To keep a long story short, the Percent Bullishness (or %B) shown on the chart below is the cleanest and most consistent gauge of sentiment I know. Key data points are plotted on the two-weekly hi-lo chart of the S&P500 Index below.

As you can see, the percent bullishness is currently among the highest recorded. This is in part due to the AAII Sentiment Index (see chart at this LINK) having swung from only 28.0% bulls last week to 41.7% this week. That is a massive one-week swing and represents the market dragging them in near the top. Note that the highest bullish sentiment on the chart was during the middle of the third wave. And that's why sentiment is only "one leg of the stool". Notice, if, as EWI suggests, sentiment is all there is, then this data point provides scientific evidence that is not the case, at least not always.

You can add to this data, the other market-related data I consider relevant as it is transaction-based. It depends on what traders do. And that is daily equity-only put-to-call ratio shown in the chart below.

Equity-Only Put-to-Call Ratio - Daily - Speculative

From the chart, you can see that price has entered the Zone of Speculation as the often-wrong small options players move in to catch the 'new' (sic) trend. Notice that single data points on this index, by-themselves, are not infallible either, as May of this year was an excellent time to purchase, not sell. But what I like about the data is they clearly show what market participants are doing, not saying. And, right now, they are speculating. Still, the moving averages (5, 20 day) could go lower. Those averages have been lower in history.

Sentiment observers will also note that the CNN Fear & Greed Index recently swung from Extreme Greed, to Neutral, and back to just Greed. So, in the manner they measure it, too, 'Extreme Greed' was not the market high, either. Prices are higher than when the Extreme Greed was registered. Again, this is counter to what would be expected in EWI's market model.

I suspect that some of this discrepancy is due to the fact that a good number of decisions are being made by a) machines/algorithms, and/or b) passive investors, and that some of the recent jumping in is due to the FED being interpreted that they will continue to lower rates. One adage market players use is "don't fight the FED", right?

Whether that is the case, a very common technical measure - the NYSE Advance-Decline line made new all-time highs this past week. Again, it would be very, very unusual for a major bear market to start with that condition. Usually, there is a significant divergence before a true bear market begins.

But some other anecdotal evidence is also 'piling up' on the side of a heated market. Jim Cramer, host of Mad Money, said Friday night (paraphrasing), "Just buy the Mag 7. These stocks are in control of their own destinies". And CNBC, whose commentators, are almost never allowed to use the 'bear' word was heard on Friday, via host Brian Sullivan, to say, (again paraphrasing), "Pfff. a 10% correction? We don't even care if that happens. That's reasonable. Those happen." No worries, right? 6600 - 10% = 6000, right? No issues.

So, in sum, it seems the data may indicate we are near the end of "a" wave, and maybe the Minor A wave I'm expecting. But it may not be the end of "the" wave yet. I remain flexible and ready to watch for either - based on measurements and wave counts. But time will tell.

This is the second post this weekend, and the first one has more wave-related measures in it.

Have an excellent rest of the weekend,

TraderJoe