FEAR AND GREED CONSENSUS (Negative Consensus/Bull Market Indicator) Head for the hills!

August 13, 2014

Is the stock market about to get ugly, Sharknado style?

Is the stock market about to get ugly, Sharknado style?

No it’s not another Sharknado alert. It’s the apparent unanimous feeling of investors that something really bad is about to happen to stocks. The latest snapshot from the CNN Fear and Greed sentiment indicator paints a picture of downright fear.

Suffice to say, investors have been taken on one heck of a roller coaster ride. When we last checked in to the indicator in June, sentiment was nicely perched in the Extreme Greed zone. Prior to that in March the index was again in Extreme Fear, but nothing like it is now. As of this writing, the index was posting an 8 indicating, Uber Extreme Fear (we added the Uber). In the time we have been observing this index, it has never reached into the single-digits.

When you break down the indicators used, it’s a pretty ugly picture.

  • The S&P 500 is 2.03% above its 125-day average, compared to 4.94% in June. During the last two years, the S&P 500 has typically been further above this average than it is now, indicating that investors have become less confident in market returns going forward.
  • During the last five trading days, volume in put options has lagged volume in call options by 38.96% (vs 45.64%  in June) as investors make bullish bets in their portfolios. 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 2.64 percentage points during the last 20 trading days. This is opposite from June where stocks were outperforming bonds by 3.09 percentage points. 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 0.64% more of each day's volume has traded in advancing issues than in declining issues (In June is was 13.88%) This indicates that market breadth is worsening, though the McClellan Oscillator is still towards the lower end of its range for the last two years.
  • The CBOE Volatility Index (VIX) is at 13.82 and remains stubbornly entrenched in the lower teens. This is a neutral reading and indicates that market risks appear low. Complacency appears to be rampant.
  • The number of stocks hitting 52-week highs exceeds the number hitting lows but is at the lower end of its range, indicating extreme fear.
  • Investors in low quality junk bonds are demanding 2.21 percentage points in additional yield over safer investment grade corporate bonds.  In June the spread was 2.16 percentage points. This spread remains higher than what has been typical during the last two years and indicates that investors are highly risk averse.
The stock market has been as ridiculous as this scene from Sharknado. What's more ridiculous is that the market could still have room to move further up in the near term.

The stock market has been as ridiculous as this scene from Sharknado. What's more ridiculous is that the market could still have room to move further up in the near term.

And yet…the stock market indexes trudge along to near record highs. There have been a lot of stops and starts, mostly as a result of geopolitical flare-ups, but the stock market seems to have an extra thick layer of Teflon. Nothing seems to be sticking to it. As long as interest rates continue to track at next to nothing, the environment is there to pick up yield, which is a heck of a lot better than lending it out. Euro rates are now negative. Germany 2-year bonds are posting negative rates.