FEAR AND GREED CONSENSUS (Negative Consensus/Bull Market Indicator) Investors take their worrying to the sidelines

July 7, 2015

In late February we perused by the CNN Fear and Greed Index and were astonished to see how much of a 180 the sentiment indicator took as it jumped to an uber level of positive sentiment after brushing the near depths four months prior. With all the geo-political and frothiness we're being exposed to these days, the time was ripe for a check-in on the Index. Four months later, sentiment has yet turned on a dime with the Fear and Greed Index now wallowing in the low teens, indicating a high level of fear present in the stock market. Update: This snapshot was taken before the Greek Referendum where its citizens voted to essentially go their own way. The market volatility that potentially ensued took the Index down even further to a reading of 12.

 Source: CNN/Money: Investors appear to be doing a lot of hand wringing these days. Fears of an interest rate hike and default in Europe having an impact?

Source: CNN/Money: Investors appear to be doing a lot of hand wringing these days. Fears of an interest rate hike and default in Europe having an impact?

A drill-down into the technical indicators that make up the index show that investors are consistent in their concerns about where stock prices are currently. 

  • The S&P 500 is slightly below its 125-day average compared to February when it was almost 4 percent above its 125-day moving average. During the last two years, this index has typically been above this average, so rapid declines like this indicate extreme levels of fear.
  • During the last five trading days, volume in put options has lagged volume in call options by 22.73%. In February the lag was 44%. Investors appear to be making more 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.
  • Stocks and bonds have provided similar returns during the last 20 trading days. In February stocks were outperforming bonds by just over 6.25 percent. This has been among the weakest periods 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 10.00% more of each day's volume has traded in declining issues than in advancing issues, pushing this indicator towards the lower end of its range for the last two years. In February approximately 10 percent more of each day's trading volume was going into advancing issues.
  • The CBOE Volatility Index (VIX) is at 16.79, 21.08% above its 50-day moving average and indicates that investors are concerned about the near-term values of their portfolios. In February the VIX was at about the same level but was coming off a period where the index was hovering in the low 20's.
  • 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 February more stocks were hitting 52-week highs than lows and was at the upper end of its range.
  • Investors in low quality junk bonds are demanding 1.98 percentage points in additional yield over safer investment grade corporate bonds. This spread is higher than what has been typical for the last two years and indicates that investors are risk averse. In February they were demanding a 2.13 spread.

It appears the Greek Tragedy that is being played out in Europe coupled with the constant dart throwing by Soothsayers on when the Federal Reserve will embark on a program of normalizing interest rates have forced investors to sit out the next dance. This despite stocks continuing to propel to record highs on a fairly regular basis. Financial engineering via stock buybacks and dividends financed with cheap money can do that. Enough sentiment and technical indicators like the Fear and Greed Index are out there out there saying stocks are exposed to a serious pullback, yet the Teflon nature of the stock market that is being greased with low interest rates is making it difficult for any meaningful negative traction to take effect. Until that paradigm changes, investors who are doing a lot of hand wringing these days on the side lines could be missing one hell of a final act.