Complacency Close to Extreme Yet Again

Complacency as measured by various market indicators is reaching very dangerous levels for the bulls, yet again. See for yourself.

First indicator provided by SentimenTrader shows that both short-term and long-term, optimism is very close to extreme which is generally a bad sign for the markets.

The second indicator is the AAII bull/bear index, reaching a level close to the all time high reached in 2010 and higher than the tops of 2007-2008 (source: Bloomberg via ZeroHedge)

The third indicator is the spread between OEX option trades and equity put-call ratio (considered to be a good indicator of smart-money vs dumb money). This indicator is also reaching a very high level, close the previous tops of 2007, 2011 even though it's still far away from the tops of the internet bubble era (source: SentimenTrader).

The following two charts are the equity put-call ratio on the S&P 500, showing a dramatic drop, at 2SD from their 3 year averages. Option buyers are betting the house on the market rallying, forgetting about buying insurance (puts) and loading up on speculative calls.

Finally, the last two charts are the 6month VIX and the 5 year VIX. The VIX is yet again below 20, having closed at close to 18 on Friday (source: Yahoo Finance).

The Fear-Index is showing no fear, and is close to its lowest levels since late 2007. Moreover, it means buying puts is cheap, so I will most likely take advantage of this offer that Mr Market is giving me :-)


Tiho said...

Well, even a broken clock can be right twice a day. After constantly betting against the market between August 2011 and October 2011 (which was the bottom mind you), you have missed a HUGE rally from 1075 to 1320.

Obviously we are overbought and optimism is back. So did you buy some Puts?

I did yesterday, for a short term trade. However, I have a feeling, even though I'm shorting here for a short term, that all of us will be wrong and that there will not be a pullback. It is almost too easy for everyone to be a contrarian here and short the S&P 500...

My trade is very very very very small 0.1% of NAV anyway, while majority of my portfolio or should I say 100% of it is long Silver, long Agriculture and short US Dollar.

Either way... cross your fingers and wish us Put buyers some luck!

pej said...

I'm like you, though bigger than 0.1% of NAV: about 1% of AUM

It's collar position, so I'm not betting the farm on a collapse here.

What you tend to forget, is that most of the time when I short something, I hedge it. Sometimes, my short doesn't work out, but over the lifespan of the short, I do make profits on the hedges.