FEAR AND GREED CONSENSUS (Positive Consensus/Bear Market Indicator): Game back on for stocks

February 27, 2015

It was nary four months ago when we last checked in with the CNN Fear and Greed sentiment indicator and at that time, sentiment was downright and ludicrously negative. For the first time since I’ve been following it, the index reached 1. It was flashing very much a head for the hills type message. It appeared the stock market was on the verge of a serious nervous breakdown, a breakdown that many including myself had been anticipating. What happened next? One hell of  a 180 turn.

According to the indicator, investment sentiment is back to giddy again. The index is flashing a level of 78 indicating an extreme level of bullish sentiment by investors. Pretty much every indicator was flashing extreme fear a few months ago. Not so much now.

  • The S&P 500 is 4.06% above its 125-day average compared to October where it was 1.65% BELOW its 125-day average.This is further above the average than has been typical during the last two years and indicates greed on the part of investors.

  • During the last five trading days, volume in put options has lagged volume in call options by 44.21% compared to 24.65% lag in October as investors make bullish bets in their portfolios. This is among the lowest levels of put buying seen during the last two years, indicating extreme greed on the part of investors.

  • Stocks have outperformed bonds by 6.26 percentage points during the last 20 trading days compared to October where bonds were outperforming stocks by 6.14 percentage points, which at that time marked one of weakest performance of stocks relative to bonds in two years. This is close to the strongest performance for stocks relative to bonds in the past two years and indicates investors are rotating into stocks from the relative safety of bonds.

  • The McClellan Volume Summation Index measures advancing and declining volume on the NYSE. During the last month, approximately 10.52% more of each day's volume has traded in advancing issues than in declining issues, compared to October when approximately 18.42% more of each days volume was trading in declining issues than in advancing issues. This change pushing this indicator towards the upper end of its range for the last two years indicating market breadth is very strong.

  • The CBOE Volatility Index (VIX) is at 16.32. This is a neutral reading and indicates that market risks appear low. This is in contrast to last October were the VIX was trading at 20.33 or 45% above its 50-day moving average. Fear is not as rampant than in October.

  • The number of stocks hitting 52-week highs exceeds the number hitting lows and is at the upper end of its range, indicating extreme greed. This is the mirror opposite of October where the number of stocks hitting 52-week lows exceeded the 52-week highs.

  • Investors in low quality junk bonds are demanding 2.13 percentage points in additional yield over safer investment grade corporate bonds. In October it was 2.33 percentage points. This spread is lower than what has been typical during the last two years and indicates that investors are pursuing higher risk strategies.

In the last four months we’ve seen commodity and oil prices collapse, the returning of hand wringing on whether Greece will leave the Euro, the European Central Bank engaging in its own Quantitative Easing program to keep interest rates low and fight deflationary threats, and of course geo-political tensions abound. Despite all of this, stocks have continued to go up. It is truly a Teflon stock market. No level of negativity is sticking to it. At some point the party is going to stock but as long as central banks continue to keep excess liquidity in the financial system at ridiculous levels, the incentive for stocks to go up  in the short term. The stock market is literally a game of musical chairs. You can’t help but want to dance, but you need to be near the exit sign or have a good view of it, when the music ultimately stops. No ETA on this yet.