4 Stock Market Sentiment Indicators: Euphoric-Plus

Sentiment indicators like these show how investors really feel. Skin-in-the-game measures are hard to argue with. Instead of simply asking whether someone is bullish or bearish and tabulating results, these show where money is being placed and how much.

The percentage of stocks in the S&P 500 now trading above their 200-day moving average is reaching that point where you may want to start thinking about it. The measure is sitting at a more extreme level now than at any high of the past 3 years.

Nothing wrong with stocks going up and with many stocks going up at the same time but sentiment readings like this one are not necessarily ideal. It’s that “everything on one side of the boat” imbalance — sometimes a great deal of selling follows.

Here’s how the NASDAQ-100 NDAQ looks using this metric:

This is the index containing the biggest high tech names. Right now, almost 90% of these stocks are trading above their 200-day moving averages. You can see how only 10% of stocks back in March were above their 200-day’s. It’s been an extraordinary rally — have we reached overbought status yet?

Other such measures have a similar look.

There’s the put/call ratio. How many puts are purchased versus how many calls are purchased. Options traders buy puts if they think the stock market is headed down and calls if they think it’s going up. It can get much more complicated than that with options, but that’s the basic stuff.

A low put/call ratio means not many options traders are buying puts. This suggests strong bullish sentiment, typically. A very low put/call ratio suggests almost no one in that world thinks the purchase of puts is even worth considering. That’s what we’ve got right now:

And then there’s Tesla. It’s not widely considered a sentiment indicator as such, but since it’s been the hottest, most well-known hot stock of its generation, I think we can include it as something demonstrating possible excess.

Especially now that it’s joining the S&P 500 and all of the ETF’s that are supposed to mirror that index are now required to own the stock — or, possibly, at some point, sell the stock all at once.

So that’s from about 69 all the way up to 690 in one year’s time. This is the type of move that used to be seen in penny stocks. There may be other well-known components of the S&P 500 that have gained so much so quickly this year but I am unaware of them.

This is no slam at Tesla or those who invest in the company — the point is, you don’t often see moves like this in everyday, ordinary markets. Combined with the other 3 classic sentiment indicators, it’s hard to come away with a comfortable feeling.

To be sure, experience tells us that stocks can continue to run up for longer than metrics or good sense suggest. Nothing’s guaranteed.

I do not hold positions in these investments. No recommendations are made one way or the other.  If you’re an investor, you’d want to look much deeper into each of these situations. You can lose money trading or investing in stocks and other instruments. Always do your own independent research, due diligence and seek professional advice from a licensed investment advisor.

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