Tariff Impact Negligible: Bear Market Unlikely

Sentiment Indicators

Surprisingly, the CNN Fear and Greed index was still stuck on extreme fear after the rally on Monday as it was at an 8 out of 100. The table below reviews some of the sentiment indicators and shows if each one is a bullish or bearish signal. The put to call ratios for 3 days and 10 days are bullish signals because they are high. This means more traders are seeking protection than looking for upside. It’s not a great time to buy puts and sell stocks after a correction. It’s interesting to see the financial media wondering when the next correction will happen after it happened; this was just like how the media wondered if a melt up was coming in January after it already happened.

As you can see, the VIX is above 20 which is a bullish signal. The VIX is clearly still too high considering the economic and corporate fundamentals. Even though the American Association of Individual Investors survey is neutral, it’s interesting to see how the bears have increased by about 7%. Individual investors have a terrible investing track record. The advisory services sentiment index is too optimistic and investment managers are a neutral signal. The crowd survey has switched from optimism to pessimism, mimicking the market’s performance. I doubt all of these indicators will tell you to buy stocks by the time the bottom hits; as you know, I think the bottom end of the range is the market’s floor.

Volatility Only In Stocks

As I mentioned, I think the volatility will fall over the next few weeks because the headlines about tariffs got out of hand. The chart below shows the 12 month historical implied 3 month S&P 500 volatility compared to the average 3 month volatility of interest rates, currencies, commodities, and credit. As you can see, the recent action has been focused mainly on stocks as other asset classes have seen a decline in volatility. The question is if stocks know something other investors don’t know. I think stocks are wrong in this case, but obviously, that’s not a rule to live by.