Monday, October 15, 2007

Investor Sentiment Check Reveals Too Much Complacency

In my opening post, I alluded to the fact that investor sentiment seems to have become a bit complacent. Given how much the markets have rallied, this isn't surprising. Investors always become complacent toward the later stages of a given move.

But the indicators I track are flashing a caution signal right now, and this is why I have raised cash and moved to a more defensive position.

This morning, the volatility indexes (VIX/VXN) are spiking +13% higher, but the put/call ratios are still too low. This is not a good signal, and confirms what the moving averages of the put/call ratios are saying.

To wit, the 10-day average of the CBOE put/call ratio hit 0.84 Friday, one of its lowest levels this year. And the 10-day ISE Sentiment Index moved above 150, which also is a level that normally signals too much complacency among investors.

Looking at the investor surveys, we see a similar trend. The bull/bear spread in the Investor's Intelligence survey hit +39, its highest level this year. And bulls in the Market Vane survey reached 69%, also a lofty level.

I still think the markets will move higher into year-end. But this sudden spike in bullishness/complacency makes me a bit cautious in the near-term. I think the market needs to correct a bit, and could remain choppy for the first part of earnings season.

But if we rally strong later in the year, I would not be surprised to see these same indicators move further into bullish territory after a pause here.