FEAR AND GREED CONSENSUS (Negative/Bull Market Indicator)

October 12, 2014

Well it can't get any worse than this...can it ?

Well it can't get any worse than this...can it ?

The last time we peaked into the CNN Fear and Greed sentiment indicator we were heading for cover from the barrage of Sharknado references. I thought that was a bad enough metaphor for the fear that was in play at the time, but it appears things can get worse than flying sharks. The current snapshot from the index not only shows fear but ludicrous fear. That’s right we’ve gone from Sharknado to Spaceballs references to gauge investor sentiment.

In August the indicator was at 8 which was pretty bad. As of this writing, the CNN sentiment indicator was posting a 1. That’s right a one. Un. Uno, which is lowest number we’ve ever seen this index post. Queue Spaceballs!


There have been many start and stops for stocks since August the index has taken its respective hits. It appears from the indicators in the index that this latest iteration might have some legs.

To get to a 1, you pretty much have to have every metric flashing red and that is what has happened.

  • The S&P 500 is 1.65% below its 125-day average compated to 2.03% in August and 4.94% in June. During the last two years, the S&P 500 has typically been above this average, so rapid declines in the spread like this indicate extreme levels of fear.
  • During the last five trading days, volume in put options has lagged volume in call options by 24.65% (vs 38.96% in August). However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.
  • Bonds have outperformed stocks by 6.14 percentage points during the last 20 trading days compared to 2.64 percentage points in August. This is close to the weakest performance for stocks relative to bonds in the past two years and indicates investors are fleeing risky stocks for the safety of bonds.
  • The McClellan Volume Summation Index measures advancing and declining volume on the NYSE. During the last month, approximately 18.42% more of each day's volume has traded in declining issues than in advancing issues (in August there 0.64% more trades in advancing issues), pushing this indicator towards the lower end of its range for the last two years. This indicates that market breadth is worsening.
  • The CBOE Volatility Index (VIX) is at 20.33, 45.13% above its 50-day moving average (in August the VIX was at 13.82) and indicates that investors are concerned about the near-term values of their portfolios. Fear is returning to the market.
  • The number of stocks hitting 52-week lows exceeds the number hitting highs and is at the lower end of its range, indicating extreme fear. In August it was the opposite.
  • Investors in low quality junk bonds are demanding 2.33 percentage points in additional yield over safer investment grade corporate bonds. In August it was 2.21 percentage points. This spread is much higher than what has been typical during the last two years and indicates that investors are highly risk averse.

There have been some false negatives in the past few months as the market digests and parses the Federal Reserve smoke signals and concludes interest rates are going to go up soon…or not. Europe is readying to throw the kitchen sink at deflationary malaise that has taken hold…or not. The Soothsayers worry about geo-political concerns in the Middle East, Hong Kong, and Europe…or not. Ebola has come to North America and many worry that an epidemic is at hand…or not. One day the world is coming to an end. The next day, all is good. Investors don’t really know what to do with themselves. So far according to the index, there have been 5 periods where some element of fear has been projected and 5 period where some element of exuberance has been expressed. If we are truly running into a malaise for stocks then some great companies will be going on sale. It may be time to sharpen the pencils, put some Red Bull in the fridge, and start marking off some stocks that could be available on the cheap.