The stock markets have lately been on a tear, but sentiment indicators are beginning to flash warning signals. These indicators are seen as contrarian gauges and if readings become overly bullish—as they are now—a period of consolidation or correction in the market is expected.
CNN Money’s Fear and Greed Index, which combines a number of U.S. indicators, is in the “Extreme Greed” zone. Among the components signalling caution is the much-reduced premium for junk-bond yields and a plunge in put-option volumes.
Meanwhile, the Investors Intelligence survey shows a jump to 53% in the proportion of advisers describing themselves as bullish. This is 31 percentage points more than that for bearish advisers. In a recent note, Gluskin Sheff economist David Rosenberg described this as a spread traditionally associated with “a near-term pullback.”
The CBOE Volatility Index (VIX), which is the fear gauge based on the prices of S&P 500 options, has plummeted to the 12.6 level. This is a 5-year low, hovering just a hair above the levels of complacency reached prior to the bear market of 2007 to 2009.
But if market weakness does emerge, it could perhaps be just a dip in an extended cyclical upturn, considering the central banks’ greater commitment to reflating economies this time around.