Markets Report: elevated Fear near all-time highs
Everyone is watching out for a pullback. Is this it?
As I wrote last weekend:
It is not common for the S&P 500 to make a new all-time high, then immediately meltdown the next day (as it did on Friday). These are typically news-driven events that can lead to more short term volatility, but longer term is followed by more gains.
This week saw U.S. equities swing up and down with no overall direction. VIX jumped above 28 on Friday morning, which is extreme considering that the S&P is not far from an all-time high. Such heightened levels of anxiety occurred during the 1999 and 2020-2021 melt-ups. In these frothy markets, investors are skittish (worried that the bubble will end), so fear (VIX) spikes every time we get a pullback:
U.S. Stocks
Options
Stocks need to work through some of the froth. Options traders were wildly bullish just 2 weeks ago. The $ value of S&P 500 Call volume - the $ value of S&P 500 Put volume, which spiked, is now falling:
The $ value of ALL call options - put options spiked, and is also falling:
Sentiment
The CNN Fear & Greed Index is approaching Excessive Pessimism:
The S&P 500’s Daily Sentiment Index is still elevated:
Sentiment Surveys
Sentiment according to the AAII survey leans bearish. The AAII sentiment survey has been consistently less bullish than other sentiment surveys during this entire rally:
According to the Investors Intelligence report, newsletter writers are still bullish:
According to the NAAIM Exposure Index, active investment managers are bullish:
Corporate Insiders
The Corporate Insider Sell/Buy ratio remains elevated. Insiders have no interest in buying stocks after such a massive multi-month rally:
Fund Flows
*Fund flows aren’t automatically contrarian. It depends on what type of trader is buying/selling and why. Some ETFs are traded by mean-reversion traders, while other ETFs are traded by trend followers. Moreover, many ETFs are small relative to the underlying market, so fund flows don’t always reflect broad sentiment towards that market.
VIX ETFs are traded by mean-reversion traders; they buy when VIX is low and sell (take profits) when VIX is high.
VIX ETFs saw non-stop inflows over the past few months while stocks rallied; these traders were betting on VIX to jump and stocks to pullback. Now that VIX has jumped, these traders are starting to take profits on their long-VIX ETF positions. Fund Flows have turned negative.
Breadth
Here are the % of S&P 500 stocks above their 200 and 50 day moving averages:
Trend
The trend is your friend, until it ends. Stocks are still trending higher, but this could change soon:
Why does trend matter? Because at least from a trend following perspective, it’s better to buy when the market is trending Up (e.g. above its 200-DMA) than when the market is trending Down (e.g. below its 200-DMA).
*There is nothing “special” about the 200 day moving average, except the fact that it’s popular. It is not significantly different from the 195, 190, 185, 180, 205, 210, 215, or 220 moving averages.
Long above vs. below the S&P 500’s 200 day moving average:
Long above vs. below the S&P 500’s 50 day moving average:
Long above vs. below the S&P 500’s 20 day moving average:
Earnings & Valuations
Some traders say that valuations and fundamentals are useless, and that “only price matters”. While this is true for day traders (valuations have zero impact on the market’s short term direction), fundamentals matter for traders and investors with longer term horizons.
Valuations for large cap stocks (S&P 500) remain elevated compared to their 10 year average:
Here’s the S&P 500’s forward earnings expectations. In the long run, earnings and stock prices move in the same direction. Earnings are still growing right now.
