Can You Hear the Shifting Sentiment?
Let's check the sentiment indicators to see if the permabulls are changing their tune.
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It wasn’t only Caesar who needed to beware of the ides of March. Market participants needed it as well.
I know it feels as if the selling is endless but let me report that, while a wide range, Nasdaq has mostly been sideways this week. So has the S&P. What’s more, over the last eight trading days, up volume has been higher than down volume for Nasdaq for five of them. Does that sound like panic? No, it does not.
But we did see a welcome change in sentiment today. The put/call ratio finally closed the day over 1.0. This is the first time it has done so since January 2nd. That’s a lot. Consider we have had a ten percent—relentless—decline, and Thursday was the first day there were more puts than calls bought. And prior to that January reading we have to go all the way back to just prior to the election to see a reading over 1.0.
I have been at this for more than four decades, and I do not believe I have ever seen a refusal to buy puts like this before. Maybe it’s that folks are spending so much time unwinding four straight months of call buying. Whatever it is, that changed on Thursday.
It is not enough to push the ten-day moving average to anything close to an extreme. As you can see on the chart, smaller declines than this have caused more panic, but perhaps Thursday is the beginning of something more.
I have been asked why the VIX hasn’t gotten jumpy. I don’t have an answer, but the VIX is based on S&P options, so if folks haven’t been buying puts, the VIX remains subdued.
There is one more sentiment indicator that baffles me. NAIIM’s Exposure fell to 68. While that is a welcome move in that direction, we have seen this collapse on much smaller moves in the past. Heck, it was a lot lower in January than it is now.
Anecdotally though, you can hear the shifting of sentiment. Permabulls who were screaming, the bottom is in, a week ago are now conceding that we’re in a correction (thank you!), but we will not have a bear market. I guess we call that a downgrade!
We have had several Wall Street firms dial back their earnings estimates for the year. We’ve even had several take their price targets down for the year. So, expectations are no longer as lofty as they were just a few weeks ago. With this being the final month of the quarter, I suppose we should get ready for company earnings to come with a lot of caveats and warnings.
Finally, to finish off the discussion on sentiment, the Daily Sentiment Index (DSI) for the S&P is at 27 while Nasdaq is at 25. They can finally go on a watch list now that they have a two-handle.
The last two Fridays have been green days; let’s see if that pattern changes. If it changes and we have a down day, perhaps those DSIs will push closer to the lower 20s. Note it will take a lot to get them to single digits though. That last mile is always a struggle.
