With Talk of S&P 8000, Here Are Some Sentiment Measures to Watch

There is so much chatter these days about margin debt. And after the last week in the market, there is now chatter about blow-off tops. Oh, not from the newfound bulls—no, they think this is the everything market. So let me address this.

First margin debt. I used to keep a chart of it, and it could be useful at times, but not always. Thus, I stopped paying attention to it because it was very hit or miss. Let me just say that I think there is no level that makes margin debt scary. There is no level that says ‘enough’. However, having that much margin—leverage—in the system is never good if it turns against you. Just witness the Situational Awareness blow-up last week. I would call it a sign of excess.

I would also call it a sign of excess when Tuesday’s action saw record call volume. We know the put/call ratio dropped quite substantially on Tuesday (to .69), the lowest since late May. But if we use the ten-day moving average of the put/call ratio, we find it sits at .90 so it hasn’t shown excess on a continual basis. But it could get there over the next week.

Yesterday, I noted how it seemed folks were quite quick to turn bullish. There is now talk of S&P 8000 coming our way. And then there is the everything rally (their term, not mine). Aside from the fact that the market spent most of the day chopping about on Wednesday, one of the biggest changes was that the volume in the QQQs calmed down, with volume only 35 million shares, down from the 50+ we saw in the prior days.

So was the last few days a giant round of short covering? Maybe. Possibly.

Yesterday, I also said I was looking forward to seeing the sentiment surveys this week, and they did not disappoint. The Investors’ Intelligence bulls were up four to 53.7%. They were 55.8% in late June, so there is some room. And let me remind you the survey is through last Friday, and Friday’s market closed poorly.

But it’s the bears that caught my eye. They fell to 14.8%, the lowest reading since late February. One thing that is bullish when the market is at the lows and has sold off is the runway to get the indicators to overbought, or the sentiment to an extreme bullish reading generally takes weeks. Just witness how the market bottomed in late March, and it took until late June for the bulls to top 55%. That is not the case today.

I like to look at the ratio of bulls to bears. That is now 3.63. That means it is higher than it was in late June (you see, when you start at a high level, you get to an extreme faster!). It last topped 4.0 (my line in the sand) in late February and prior to that, late October.

So I don’t know if this is a blow-off top, but I do know the market seems to be heading toward a sentiment extreme. It could get there next week.