But all of that is subjective, as a certain barefoot speculator would chide. What do the data tell us?
The equity put-call option data tell us that bearish sentiment is off the chart. Literally.
My data show that we have seen 12 of the last 15 trading sessions in which the volume in equity put options has exceeded the volume in equity calls. To put that into perspective, from January, 2001 through mid-February, 2007, we only had a total of 44 days (out of 1527!) in which put volume exceeded call volume among equities.
Moreover, we've had several days recently (February 27 and March 13 stand out) which have seen higher put-call ratios than *any* day during the 2001-2003 bear market. Indeed, during that bear market, we *never* saw a 20-day put-call ratio exceed 1.0, as it does at present.
What makes this surprising from my perspective is that all of this bearishness is occurring without us being down so much as 10% on the major averages. In my recent video, I review the price and money flow for eight major S&P sectors. From the vantage points of both price and flow, the recent drop so far has been no greater than any other correction during the past several years. But it certainly has engendered greater fear among options participants.
Going back to 2001, such fear has had bullish implications. When we've had a single put/call reading above 1.0 (N = 44), the next 20 days in the S&P 500 Index (SPY) have averaged a gain of 2.09% (33 up, 11 down). That is quite a bit stronger than the average 20-day gain of .16% (899 up, 628 down) for the entire sample.
If we just go back to 2004, we find 30 instances of equity put/call readings above 1.0. Twenty days later, SPY has been up by an average of 1.48% (23 up, 7 down). In Vegas, I'd take those odds.
I've seen a few historical comparisons between the current market period and past ones. Most of those comparisons look for similarities between this market and past market tops. In some ways, however, from a sentiment vantage point, this market reminds me of 1987 *after* the huge drop. It was such an anomalous event and major decline that it turned sentiment on a dime. In the Investors' Intelligence survey, for example, the percentage of bears to bulls shifted from 17:60 in August to 45:28 in October. It also led to further selling in the near term and restrained performance for much of 1988. Ultimately, however, we look back on that period as a time when extreme bearishness had it wrong.
Perhaps, however, the better analogue would be the market of the mid 1990s. Then, as recently, we had record low volatility. We then climbed to new highs in 1995, just as we made new highs in 2007, but occasional market drops took their toll on sentiment. For instance, we saw bears outnumber bulls in the Investors' Intelligence survey after market corrections in November, 1995; August, 1996; and April, 1997. This tendency for even relatively mild corrections to engender strong bearish sentiment was a major part of what kept that bull market going.
In the recent market we see a significant pickup in bearish sentiment in the AAII poll--from 27% bears and 58% bulls in January to 45% bears and 33% bulls most recently--but not so far in the Investors' Intelligence survey. If we look at weekly data for all listed options, we have to go back to July, 2004 to find an equivalent, elevated ratio of put volume to call volume. Before that, we saw similar elevated levels in February, March, May, and November, 2003--all good buying opportunities for investors.
One last observation. The VIX bottomed at 8.89 intraday on December 27, 1993. The market correction drove the VIX higher to 28 in early April, 1994 and a later correction late in 1994 took us back toward 20. From that point forward, we continued with sub-20 VIX levels throughout 1995 and into early 1996 as the market moved steadily higher. When we did finally break out to consistently higher VIX levels in March, 1996, it was in an environment of upside volatility, not market weakness. Moral of the story? A bottom in VIX does not at all necessarily imply a major market top. It hasn't taken much price weakness to get the bears growling. This time may be different and--as I recently stressed--I need to see dollar volume flows and solid price action show me that we can put in a bottom here. Still, I don't think market history is on the bears' side.
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