Date: June 1, 2020

Sentiment Percolating

Starting in the middle of November 2019, stock market sentiment went from bullish to giddy and then greedy before all was said and done. It had done that before in early 2017, 2018, mid-2011 and clearly during the Dotcom Bubble in 1999 and 2000. Sentiment alone is not a reason for markets to turn although we usually see that ingredient at extremes. Sentiment is also not a perfect timing tool. Remember the old adage that markets can stay irrational longer than you can stay solvent.

From downright greedy in early 2020, markets ran the full spectrum to fearful, panicky and despondent in March. No surprises there. The masses were in full fetal position as this wasn’t just a market event, it was a full blown health crisis where people feared for their lives.

Fast forward just two months and we find investors certainly getting bullish. Giddy and greedy? No. Let’s take a simple look at what options trades have been doing lately since they are usually wrong in sum total, especially at extremes.

Below is a chart of the S&P 500 on top and 10 day average of the put/call ratio which is just the total number of put options (looking for lower prices) versus call options (looking for higher prices). With stocks steadily marching higher, options trades have become increasingly more positive as you can see from the lower chart which is trending down towards the area of Q1. Just looking at this in a vacuum has to make bulls a little uneasy.


Paul Schatz, President, Heritage Capital