FEAR AND GREED CONSENSUS (Negative Consensus/Bull Market Indicator) Winter Is Coming

December 11, 2015

When we last checked into the CNN Fear and Greed Index in July, sentiment was pretty weak in the low teens. It got progressively worse in August thanks to the China kangaroo court of financial regulations and the Greek tragedy that was dragging painfully along. At one point the index touched 1. That’s right a single point!

Source: CNN/Money

Source: CNN/Money

Fast forward to year end and we thought we’d peek in to see if sentiment had changed much. It appears sentiment has soured of late as the index is back in the Fear side, touch in the mid-30’s after cruising in the mid-60’s only a month ago. Break down of the components of the index revealed the following:

  • The S&P 500 is slightly above its 125-day average compared to July when it was slightly below the 125 day moving average. During the last two years, the S&P 500 index has often been further above its 125-day average than it currently is, so declines like this indicate extreme fear.
  • During the last five trading days, volume in put options has lagged volume in call options by 24.24%  compared to 22.74% in July 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 fear on the part of investors.
  • Bonds have outperformed stocks by 1.71 percentage points during the last 20 trading days compared to July when they were essentially even and February when stocks were outperforming bonds almost 6.25 percent. 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 despite rumblings of an impending interest rate hike in the US.
  • The McClellan Volume Summation Index measures advancing and declining volume on the NYSE. During the last two months, approximately 8.90% more of each day's volume has traded in declining issues than in advancing issues. This is slightly better than July when 10 percent more of each day’s volume was trading in declining issues. This indicates that market breadth is weakening, though the McClellan Oscillator is near the top of its range for the last two years.
  • The CBOE Volatility Index (VIX) is at 19.12 compared to 16.79 in July. This is a neutral reading and indicates that market risks appear low. Investors appear to be showing little concern for risk.
  • The number of stocks hitting 52-week lows exceeds the number hitting highs but is at the upper end of its range, indicating greed which is a similar output as in July.
  • Investors in low quality junk bonds are accepting 2.37 percentage points in additional yield over safer investment grade corporate bonds which is higher than in July when the spread was 1.98 percent. While this spread is historically low, it is sharply higher than recent levels and suggests from this metric that investors are becoming more risk averse.

Right now it’s all about interest rates and much of the sentiment of fear seems to be feeding off the prospects of interest rates rising in the US and potential re-introduction and normalization of the risk/reward paradigm.  In other parts of the world sentiment is being driven by a different paradigm; deflation. The race to the bottom is in full force with many central banks going all-in on money printing, deflating currencies and exporting deflation which is feeding central banks to engage in some R&D and toy with the prospect of introducing negative interest rates, which only adds to the vicious circle. The question is which path if any is palatable to investors. So far the money printers have won the day fueling paper assets to continuous record highs and this concept may still be in full effect in the short term, but does the Federal Reserve by halting the music and the party cause a mad dash to the exits?