The basic idea behind sentiment indicators is how they show us when investors may have become too bullish or too bearish. It’s usually impossible to pick the exact point ahead of time but these types of gauges can be helpful pointers. “Too many people on one side of the boat” is the concept here.
The problem with a sentiment indicator that simply asks “bullish or bearish?” — it’s a step removed from the movement of actual money. How investors are “feeling” might be interesting and sometimes useful but analysts in need of a better read have developed other methods.
Here are 3 examples with weekly and monthly timeframes:
Percentage of NYSE stocks above their 200-dma, weekly.
This gauge is the highest it’s been over the entire course of the chart — 3 years. The recovery from the March, 2020 low has gone beyond the peaks of the previous 24 months. Below the price chart you can see how the moving average convergence/divergence indicator (MACD) has crossed downward.
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Percentage of NYSE stocks above their 200-day moving average, monthly chart.
This chart’s meaning borders on slightly astonishing: right now, this month, it’s higher than it’s ever been from 2008 onward. More stocks are trading above their 200-day moving average than at anytime going back that far. This only one measure, of course, but it’s something you don’t see too often.
The S&P 500 Bullish Percent Index, weekly.
This measure is based on the point-and-figure charting method which breaks down patterns into bullish or bearish. You can see that the number of stocks in bullish formation is not quite as high as it gets sometimes, but it’s approaching that level. If the present momentum continues, the old peaks are about to be re-taken.
The S&P 500 Bullish Percent Index, monthly.
On a monthly basis, the indicator is breaking above the 2020 and 2017/2018 peaks. It may challenge that all-time 2013 high. The S&P 500 is approaching that zone where, previously, sellers began to take over.
The CBOE Options Total Put/Call Ratio, weekly.
When the ratio gets this low, it means fewer puts are being bought than calls. That is, more options traders believe stocks will continue to trend higher. The weekly put/call ratio can go lower but it’s traveling into the zone where equities have been known to lose upward momentum.
The CBOE Options Total Put/Call Ratio, monthly.
The measure is lower than it’s been since late 2013. Those who trade options are rarely this bullish about stocks. Last time around was about 7 years ago.
None of these indicators are perfect. Stocks can continue to rise even as measures such as these continue to give “danger zone” type of readings. What we’re seeing here is more of a “heads up” about the definite potential for serious tops forming.