Morning Notes — Near Term Caution

Three weeks ago, the American Association of Individual Investors (AAII) equity sentiment survey reached bullish extremes with a reading of 55.84.  This is the second highest level of bullish equity sentiment behind the all-time record of 59.75 reached on January 4, 2018.  The S&P 500 experienced -12% correction just 3 weeks later.  I can’t find one instance when extreme bullish AAII sentiment hasn’t resulted in material SPX downside within weeks of its occurrence.   Similarly, I can’t find one instance when extreme bearish sentiment hasn’t resulted in material SPX upside within weeks of its occurrence.  The CBOE Equity Put/Call ratio is another measure of investor sentiment with contrarian market implications.  Low levels of Put holdings are associated with an imminent equity market top, while high levels are associated with equity market lows. Like Individuals investors (AAII survey), option traders are considered an emotional investor class that tend to be wrong at extremes.  Yesterday, the 5-day moving average of the CBOE Equity Put/Call ratio reached a 20-year low.