WHAT IS THE REAL STORY WITH MARKET SENTIMENT AT THIS JUNCTURE?
Measuring sentiment on Wall Street is perhaps the most subjective of all the analytic arts that is practiced on a day to day basis. It is one of the many tools out there that doesn't work until it does. Those who swear by it will be quick to point to the instances when it does as justification for future speculative positions that have no better chance of being correct than using a coin to determine whether to be long or short.
Sentiment alone should not be used as the foundation for an investment thesis. You can always tell those who are inexperienced in dealing with sentiment by the level of importance they put on its readings. Those who base an entire investment thesis solely on sentiment are, in nearly every case, using sentiment as a psychological crutch to validate their prevailing bias. The truth about sentiment is that it will tell you whatever you want it to tell you at any given moment. Which is exactly why I choose to ignore sentiment measures, except when considered on the periphery of a strategy that takes into consideration numerous other factors first.
During the end of March, I posted analysis showing how to use the put/call ratio (the only sentiment measure I look at consistently) to measure the point at which 5% corrections occur within the context of a bull market. This study solidified my belief that the chances of a 5% correction seeing its beginnings in April were slim to none. May looked like a better time frame to consider for such an event.
Now is a good time to look at another measure of the put/call ratio. This time I want to look at a shorter-term measure of both the combined put/call ratio and the equity put/call ratio. The charts below are the 2 and 5 days moving averages for both of these put/calls. I use moving averages only to smooth out the results:
click chart to enlarge
EQUITY PUT/CALL RATIO
COMBINED PUT/CALL RATIO
As the charts above demonstrate, bears remain overly-anxious to regain their sanity through the creation of capital via put buying. Not necessarily what you want to see if you are hopefully bearish on the markets in the months ahead. This type of overzealous bearish investment behavior should not be occurring after such a powerful rally that has propelled the Dow and S&P 500 to all time highs.
This leads me to believe that once this option expiration week passes, the markets should regain their footing for the remainder of April. I will reassess the sentiment picture again in May.
