Mid-week market update: I like to monitor the option market from a sentiment modeling perspective because, unlike surveys which can swing all over the place, the option market is a forum where people are putting real money on the line.
Even as the stock market has been slowly grinding upwards, the option market has been showing signs of skepticism. As the chart below indicates:
- The market is overbought on RSI-5 and nearing an overbought condition on RSI-14, but…
- The VIX Index, aka the Fear Index, has been rising for the last few days; and
- The VIX term structure has also been indicating higher fear levels in the same time frame.
At the same time, standard measures of overbought/oversold and sentiment models, such as the CNN Money Fear and Greed Index
, is showing a high level of greed, which is contrarian bearish.
What’s going on? Is this just a sign that the stock market is climbing the proverbial Wall of Worry?
An overbought market
recently provided some context to the current movement in the VIX Index. As the chart below shows, the market has tended to pause and pull back after both SPX and VIX have advanced together.
As well, Urban Carmel
pointed out that the Fear and Greed Index tends to be a bit early in calling short-term tops, but risk/reward is tilted to the downside.
Currently, other short-term measures like this one from IndexIndicators
are at overbought levels where pullbacks have occurred.
My inner trader believes that while the stock market can continue to grind a bit higher and possibly make a new all-time high, the prudent course of action is to start scaling out of profitable long positions. At the same time, he will keep tight trailing stop orders on his remaining long SPX longs as he is mindful of the old Wall Street adage: “Bulls make money. Bears make money. Pigs just get slaughtered.”
Disclosure: Long SPXL