Sentiment Extremes Abound

By Lawrence G. McMillan

At the current time, there are arguably more extreme sentiment readings in the “macro” markets than at any time in recent memory.  Macro markets, as defined by economist Robert Shiller in a 1993 paper, are large international markets trading in the form of futures contracts.  In a more modern sense, these may also be trading in the form of ETFs.  These would include currencies, stock market indices, and most major futures contracts, such as Crude Oil, Gold, and so forth.  Since there is so much current activity in these markets, they are very important places where capital is (or is not) deployed by hedge funds and other large international traders who specialize in that form of trading.  We can measure sentiment through put-call ratios, as well as in other ways, such as Jake Bernstein’s Daily Sentiment Indicator (DSI).  DSI monitors traders’ opinions in about 40 different markets, and publishes the “percent of traders bullish” in each market each day.  An extreme reading is when the DSI is above 90% (“too many bulls) or below 10% (too many bears).  Fully 25 different futures markets have registered DSI extremes in the past month.

Most of these also have put-call ratio sentiment extremes as well.   A put-call ratio extreme is less well-defined, but generally it describes the situation in which the 21-day moving average of the put-call ratio in question (usually the weighted ratio) is at or near its highest point on the yearly chart (too many bears) or near the lowest point on the chart (too many bulls).... 

Read the entire "Sentiment Extremes Abound " article (published 6/15/12) to see which markets have registered extreme levels by subscribing toThe Option Strategist Newsletter.