I've been spending a lot of time lately thinking about sentiment and how it relates to the markets and investing. This has been a buzz word for a long time now, supplanting market psychology in my humble opinion. In general, it's the same thing. When markets are in the dump, everyone feels it. No one wants to invest (perhaps only a few wise investors do), and everyone is giddy when the markets are making new highs.
The old adage that the markets are made of greed, fear, and every emotion in between is true, and it pays to be aware of the emotions you are feeling when you put your money in the market.
One sentiment indicator I look at occasionally is the CBOE put/call ratio, and it's flashing something interesting lately. Since I no longer trade daily, but instead invest for the long term, I tend to watch the longer cycle of sentiment indicators now for opportunities to add to my positions.
The so-called put/call open interest ratio for the VIX has slumped to 0.33. That means options traders are holding an increasing amount of call options, which profit from a rise in the VIX, relative to put options. Since 2008, each time the ratio has fallen this much, the VIX has spiked about 70% at some point over a three-to-six-month time horizon, he says.
When traders/investors start buying call options in droves, a top is forming and its time start trimming your risk. Another day, another dollar.
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