Fear has returned from its post-"Brexit" hiatus to grip Wall Street, but does this mean stocks hit a top?
After snoozing higher for weeks, the
S&P 500 Index (SPX) was recently rattled out of its
quietest slumber in years -- just as
this indicator predicted -- culminating in its
worst week since February. The volatility hasn't stopped, either, as stocks bob and weave amid macro uncertainty and
dramatic fluctuations in oil prices. Against this backdrop, it seems fear has returned from its post-"Brexit" hiatus to grip Wall Street again. Here are seven signs that skepticism is ramping up once more -- and why stocks may not have hit a top just yet.
1. As we
noted last week, the percentage of
American Association of Individual Investors (AAII) "bulls" is hovering around 30% -- paling in comparison to the historical average of 38.5%. What's more, for 44 straight weeks, self-identified "neutral" investors have outstripped self-identified "bulls." Prior to the current streak, the longest series in which neutral sentiment exceeded bullish was 21 weeks -- all the way back in 1993.
2. Speaking of sentiment surveys, the National Federation of Independent Business (NFIB) small-business optimism index unexpectedly dropped in August, from an annual high in July. The outlook for business conditions over the next six months dropped a dramatic 7 points, and 38% of surveyed business owners cited the political backdrop as a reason not to expand -- an all-time high.
3. In fact, general unease about the upcoming presidential election is being felt across the board, regardless of gender, age, income, ethnicity, or political party, with 61% of adults polled by Bankrate citing the election as the biggest economic threat over the next six months. Further, the Financial Security Index plummeted to a two-year low in September, after 27 straight months of year-over-year improvement in financial security.
4. In the same vein, the Bank of America Merrill Lynch (BAML) survey of 208 global fund managers found that the perceived overvaluation of stocks is at its highest point since May 2000 -- just before the tech bubble burst. U.S. equity allocations fell to 7% underweight in September, from 11% overweight the month prior, and a massive 82% of respondents think bond prices are "frothy."
5. Further echoing the growing skepticism, CNNMoney's Fear & Greed Index was indicating "Extreme Greed" just a month ago, showing levels of optimism not seen since 2014. However, the index has plummeted by more than 50% in the past month, and now indicates "fear" is prevalent again.
Chart courtesy of CNNMoney
6. One of the components of the CNNMoney index is options volume, which, as you know, we monitor closely at Schaeffer's. It's worth noting that last Friday, when the SPX broke south of its recent range, the Chicago Board Options Exchange (CBOE) single-session equity put/call ratio rose to 0.78 --
the highest reading since June 27, the Monday after the "Brexit" vote. Likewise, the Options Clearing Corporation (OCC) recorded the largest put volume since late June.
Traders were quick to place bets on various exchange-traded funds (ETFs), with the SPDR S&P 500 ETF (SPY) generating the most volume since the "Brexit," and the PowerShares QQQ Trust (QQQ) generating the most options volume since April. Let's not forget that just last month,
options volume across the board was eerily quiet.
7. We'd be remiss to omit the most highly cited "fear gauge" of them all -- the CBOE Volatility Index (VIX). While the latest Commitment of Traders (COT) report indicates that large VIX traders currently have
the largest short position on VIX futures on record, this group has notoriously been wrong in the past. As Schaeffer's Senior VP of Research Todd Salamone said in
this week's Monday Morning Outlook, "this is something to take notice of in terms of the risk of a volatility pop that drives the VIX into the 20-21 area, or the June highs in the 26-27 region." And, in fact, the VIX is
just off its highest close since June, after
spending August south of a key level.
Daily Chart of VIX since June 2016
Chart courtesy of Thomson Reuters Eikon
In conclusion, it doesn't take a rocket scientist to see that Wall Street is scared. But on a positive note, remember that
market tops are generally marked by euphoria -- and we're clearly not there -- and markets tend to climb on a "wall of worry."
Once the Fed and election uncertainty are over (or maybe even before then), there's plenty of sideline cash to push the S&P and friends back to record highs.
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