Schaeffer's Trading Floor Blog

Why Now is Not the Time to Worry

How constant disbelief can be a good thing for the market

by 7/30/2014 7:40 AM
Stocks quoted in this article:

Number one on the Bull Market ThreatDown? Bears! Market bears, I mean.

First we have this, from Bloomberg:

Signs of anxiety are returning to the U.S. stock market as it hovers near an all-time high.

The Chicago Board Options Exchange's Volatility Index has risen 8.6 percent in July to 12.56, poised for the biggest monthly advance since January. That's led traders to add almost $200 million to the largest exchange-traded fund linked to market swings, data compiled by Bloomberg show.

… Rising volatility has boosted trading in VIX futures. About 384,000 contracts changed hands on July 17, after a Malaysian Airlines passenger jet crashed and Israel sent ground forces into the Gaza Strip. That was the third-highest daily volume on record for the contracts, according to CBOE. The VIX jumped 32 percent that day to 14.54, a three-month high.

And if that's not enough for you, we have this from the The Wall Street Journal's "Morning MoneyBeat:"

An ominous signal is rising from the options market, where the pile of bearish options bets is growing larger by the day.

The average of outstanding "put" options on the S&P 500 and the S&P 100 indexes last week rose to twice the number of bullish "call" options, said Jason Goepfert, founder of Sundial Capital Research.

Only twice during the past 20 years has that ratio been so lopsided to the bearish side -- in mid-February 1996 and in July 2007, Mr. Goepfert said.

Both times, the market floundered in the weeks and months ahead.

"Mostly," Mr. Goepfert wrote, "the higher the [put/call ratio], the more likely stocks would struggle."

So look out below! Or not.

I know, I'm a broken record on this topic, but I just don't find it bearish if everyone is bearish. Do two articles highlighting options and volatility action with a bearish tilt make a representative sample? Of course not. But then again, the Journal article uses a sample size of two non-specific data points to note that excess put action has bearish implications. On the other hand, I do like Jason Goepfert's numbers, so I'm going to run on the assumption there's more evidence to back up the assertion that this set-up has not boded well for the market over some time frame.

In principle, though, I don't agree with the general premise. We've clearly had a nice bull run here, but part of what keeps it going is the constant disbelief in the move. Loading up on CBOE Volatility Index (VIX) futures and puts at what looks like a near-top is as clear evidence as any of the masses voting with their wallets against the market. And, anecdotally, I find that bullish on the margins.

If I was rooting for a dip (and I'm absolutely not), I would want almost the exact opposite. I'd want scant interest in VIX futures. I'd want everyone buying calls, and I'd want everyone's dentist to be bragging about their day-trading acumen.

I'm not going to go out and load up long based off two coincidental articles in major publications. I just disagree with the general premise that a rush to bearish posture amidst generally very good times is a reason for worry.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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