One Gauge Of Investor Sentiment Just Hit A 6-Year High

Via Dana Lyons' Tumblr,

There’s no question that the general level of stock investor sentiment is at historically high levels at this time. However, I think it’s probably safe to say that much of this bullishness has accrued gradually due to the cumulative stock market gains over the past 6 years. What has largely been absent, though, despite the elevated sentiment are examples of veritable investor euphoria. We are talking about bursts of frenzied, “get-me-in-at-all-costs” type of buying behavior. We did see traces of it over the past 2 years, especially in early 2013, but nothing consistent. Yesterday, however, we did see a possible example of this type of euphoria from the International Securities Exchange.

We have mentioned the ISE several times over the past year as their options ratios have become favorites of ours in gauging short to intermediate-term investor sentiment. The ISE “Equity” Call/Put Ratio has been especially helpful, at times, in identifying extremes in short-term sentiment. This series has decent volume and behaves in an orderly, “normal” fashion that renders its extremes particularly valid as accurate measures of sentiment. The “Index & ETF” Call/Put Ratio (the ISE uses call volume in its numerator as opposed to the denominator like most sources do) has at times been helpful as well. However, it has mostly been too erratic to be consistently reliable. That said, the reading of this ratio yesterday was so extreme that we thought it was worthy of today’s Chart Of The Day.

Specifically, the ISE Index & ETF Call/Put Ratio registered its highest reading (228) in over 6 years. 

At 228, the reading means that call volume at the ISE was more than double put volume. In the last 6 years, that is just the 4th time that has occurred. These are the dates of all of the readings above 180 since 2009, along with the aftermath in the S&P 500.

• July 20, 2011 The S&P 500 hit a high the following day before dropping 16% over 12 days.
• November 28, 2011 The exception as the S&P 500 was jumping off a short-term low and would rally 6% over the next week.
• September 7 & 14, 2012 The S&P 500 hit a high on the 14th and proceeded to drop nearly 8% in the next 2 months.
• January 22, 2015 The S&P 500 hit a high that day before dropping 3.3% over 6 days.

So one can see why yesterday’s reading would make us take notice. It hasn’t been unanimous, but 3 of the 4 other readings above 180 in the past 6 years led to immediate selling pressure, some mild and short-term and some more serious and over the intermediate-term.

Now, there are some obvious asterisks we would place on this study. For one, the November 2011 event led to more buying instead of selling. Secondly, as we mentioned, this series has been very erratic throughout the years and thus, hard to depend on. And third, consider the last time this indicator flashed readings this high: March 9 & 11, 2009. Of course, that was THE exact cyclical market low. So what gives? We’re not sure. The ETF’s that received the highest volume on those days were essentially the same as those from yesterday. Perhaps this particular exchange was used by unique market participants or for alternate options strategies at the time that reflected non-contrarian sentiment extremes instead.

Whatever the reason, over the past 4 years, the ISE Index & ETF Call/Put Ratio has typically been a contrarian indicator, when at extremes. Thus, yesterday’s most bullish reading in 6 years is likely not a welcomed sign for stock market bulls. It could be an example of the euphoric type of investor behavior that has been mostly missing from the general bullish sentiment picture. A few more of these examples and we would really be concerned about stocks in the immediate-term.

Comments

[Seal]

Maybe it's all Tepper

[j reuter]

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... w­w­w.j­o­b­s­-r­e­v­i­e­w.c­o­m

[Son of Loki]

"No one saw this coming."

[q99x2]

BTFD

[disabledvet]

So I'm still a bull and would not be a seller if you're long and strong...still prefer the treasuries across the entire yield curve (at the extreme short end rates have in fact rallied during this sell off which sounds an awful lot like QE 4 to me.)

Lot of great names have gotten clubbed the past six months...but the market as a whole has surged. Very impressive considering the dramatic move lower in rates, huge move higher in the dollar and the slowdown in growth.

I still think the 30 year is heading sub one percent....have to admit though Newmont Mining has had a huge move higher that I have totally missed.

[JoWazzoo]

Sub 1 % on the 30 yr would be negative in real terms.  You honesttly think nirp is in store?  Why?  Or should I say, what are you smoking?

[max2205]

I am sure NFLX calls skewed that reading on Friday

Perfectly normal

[Mini-Me]

The muppets are about to get a rude awakening - again.  You can't fix stupid.

[RatNuts]

Oh no... its a trap !

[gdiamond22]

This market is screaming for a 2011 type event. Think stocks have another 5- I don't know how fucking much higher left and then come late summer early fall Greece/EU fallout/China/Yellen whatever and volatility is back. Gotta squeeze out the last remaining equity shorts

[JoWazzoo]

Just BTFD! damn it!  When will you learn your lesson?  Hell - I would bet that in a couple of quarters when we offishully drop into recession, stawks WILL go up.  A sure thing - cause the FED assures us they have our backs.

[yellencrash]

One more big surge to new highs either after a scary drop or immediately, then look out below. They gotta crash it now. Next year's an election year.

[provokethegoyim]

a close look at mr. lyons' chart reveals that his interpretation is prefectly meaningless.  see esp. data at the 2009 bottom.

for something more truthful, have a look here -- www.provokethegoyim.blogspot.com