Stock Market Sentiment Gauges: One Is Bullish, The Others Bearish

The weekly chart of the put/call ratio is still showing many more calls than puts being bought these days, a typically bearish kind of contrarian vibe.

The reason this one gets a lot of attention is that it represents actual money. Someone out there is actually putting money on the table for a put option. Someone is paying for a call option. It’s not a measure based on what someone tells you they think about it.

The monthly put/call ratio chart is even more dramatic in its picture of investor call-buying optimism about the stock market.

But the American Association of Individual Investors weekly sentiment readings show what amounts to the opposite of the 2 options gauges. This one is based on what investors tell surveyors when asked their opinion about the market.

It’s well respected in the investment community as a measure to watch but represents no actual money as such. Nonetheless, what people say is always interesting — it’s why Presidential election polls are so closely monitored, especially these days.

Here is the most recent AAII.com sentiment reading:

Since so many are bearish — and the crowd is usually on the wrong side of the boat — this may be interpreted as, in fact, bullish for the stock market. AAII.com’s Remy Smith tells me, “It’s actually among the lowest 40 bullish readings in more than 1,700 weekly surveys we’ve conducted.” Hence, the contrarian take that stocks may continue to rise.

So, it’s odd that the 2 put/call ratios tell the opposite story.

The CBOE option weekly put/call ratio looks like this:

Although the index hit a lower level in early June, this current dip downward is among the lowest levels of the past 3 years. Translation: options traders are much more eager to buy calls than to buy puts. An excessive reading like this indicates too much optimism since calls are purchased if they think stocks are headed up and puts if stocks are thought to be headed lower.

The CBOE Options Total Put/Call Ratio looks like this on a monthly basis:

You can see clearly that the monthly put/call ratio is the lowest it’s been in about 7 years. This look of the longer-term time frame underscores how strongly options investors are pursuing bullish strategies — more calls bought, fewer puts bought, for months now. This demonstrates how excessive the optimism may have become.

What to make of a situation where one stock market sentiment indicator is telling one story and the other indicators are telling a different story?

You could make a case that the narrowing of investor interest to a group of hot big name tech stocks in the NASDAQ-100 is affecting these measures. Some former sectors are not participating in the type of bull move seen among the FAANG group — financials and energy come to mind. This widening dichotomy may have something to do with divergent sentiment gauges.

Just guessing.

I do not hold positions in these investments. No recommendations are made one way or the other.  If you're an investor, you'd want to look much deeper into each of these situations. You can lose money trading or investing in stocks and other instruments. Always do your own independent research, due diligence and seek professional advice from a licensed investment advisor.