This site is all about this pivot method but I think there are a few useful complements. I addressed the technical side of these recently in this blog post. This post is about sentiment and how I approach it. I try to keep things concise as no one has anytime for reading paragraphs anymore, but sentiment analysis does take a bit more time. 

This takes a bit of work but for dedicated traders / investors I think once a week this sort of thing can be worthwhile. The main point is to see if sentiment is at extremes, especially when running into pivot support or resistance. But instead of just one reading I like a combination. 

Here's the standard put-call ratio on a weekly chart with a 10MA in blue. The MA is the only thing I am looking at. Let's look at the extremes. In September 2011 after a fast 20% drop and down at lows this was above 1.2. Then in early 2014 with the market on QE steroids it was down to .81. So the first point is the drop last fall *which held NDX YP* helped confirm the buy setup because it was so clear using this that there was a lot of fear in the market, yet the biggest level on the leading index held. I've written several posts about it, but my view of 8/24 is that the NDX YP held because not one hourly bar closed below it on the drop. 

Conversely, at the end of 2015, put call had dropped not to absolute lows but considering the low of the year was .91 in June with everything globally at highs, there was a lot of complacency and expectation the market would be OK. The current level of 1.05 is still elevated but as we can see from September it can go higher. 

And here's the daily chart view with the same setup. Again, the relative value against extremes. If you view it this way then the end of 2015 really jumps out because put-call was down to about .87, which is just where it was near 5/20, 6/22, 7/23 and 10/29-11/3 which were the highs in the market. That said, current value .96 not extreme. It has come down sharply from the 1/15-20 readings which indicate a lot of people think low is in, expecting a bounce and/or taken off some hedges. 

OK so put-call dropping, maybe it is dropping too fast for market at lows but main point - not really at extremes. No edge, perhaps a slight point to bearish for market because it is closer to lows than highs, while stock indexes are much closer to lows. I think put-call is showing a bit more optimism than the market deserves, but still, no real extreme. 

The next thing I check is the ISEE index:

There are several things that matter. Intraday readings above 150 are too bullish and towards the end of last year even 140 area marked several key highs. Then below 75 is too bearish, although in later stages of a bull market where the pros are more concerned about locking in gains it took a string of these for a low, whereas in earlier stages one day near 75 would help confirm a decent pullback. Then I check the 10, 20 and 50MAs to see if they are pointing one way (like top / bottom 20th percentile) or at extremes (top / bottom 10th percentile. ISEE data goes back to 2002 but you can also sort for current environment. When the market was bullish I was just concerned with data from 2010 or 2012. But now I think worthwhile to include other bear market data, and you could even make a case for just using 2002-2003, 2007-08 in the current environment. However, in the early years (probably before 2008) the values tended to skew much higher. Points:

1. ISEE spike high 1/26 at 146 followed closely by 139 the next day too optimistic in my view. Consider Santa 12/24 with market at highs was 144. 2/2 did scare some folks with reading of 61, and 1/20 was very low 45. That is down there and helped confirm next move would be bounce. See how this works? 1/20 was also the date of a post called "Big turn?" just because I saw so many indexes & ETFs rallying from yearly support levels. A glance at ISEE (along with put-call above) helped confirm some bounce as next short term move.
2. Using data from 2005 on, 10MA is 63% percentile, 20MA is 93% percentile (still bearish extreme), and 50MA is 96% percentile. ISEE has been the most bearish of the readings for a while. So picture long term a lot of fear, short term very sharp jump. Like put-call, maybe too much.

Then I like the AAII reports, both the managers and the individuals. Managers here.

While this reading reached extreme low last fall of 16, again with support holding, it helped confirm a buy setup. Although interestingly, the highs here were Feb 2015 and end April 2015, so the managers correctly reduced exposure before the drop. Last fall with many main indexes testing highs, exposure was middling 70. This was likely due to weakness in breadth ie small caps. Recent readings in January reached 34 and 26. 26 is 88th percentile of all readings from 2006, so definitely on the low side but not the level when people are really afraid in depths of bear market when we would see below 20. After getting to 42 or 74% percentile last week, it is back down to 22 or 90% percentile this week. That is a bearish extreme.  

Lastly the AAII individuals.

Now this is a tricky one, because this crowd is savvy and often right! For example, last summer this index was putting in extreme bearish readings with index chopping sideways at the highs, and they were right. But even they tend to be fooled on the extremes. 

Current bull 27.5%, 89% percentile from 2005. To be clear, this means 89% of all readings were higher, and only 11% were lower. So, lower side and near extreme which I somewhat arbitrarily say top or bottom 10%. But on 1/14 the reading at 17.8% was 99.8% percentile ie the 2nd lowest reading of all since 2005. That was an extreme! Although somewhat correct because the market went lower into 1/20! 

Bull bear spread helps show the difference between the two, with the current week at 75% percentile and two weeks ago down to 95% percentile so definite bearish extreme, and that level for 2 weeks in a row. Then you can check at 8 week moving avg of bulls, which is now the absolute low. It is quite interesting to me that there literally dozens of extreme low readings in 2015, comparable to March of 2009. This means the AAII individuals got it right! 

Bottom line is that 2 weeks ago, the put-call, ISEE, AAII managers and individuals ALL at bearish extremes, and several indexes held their YS1s, or broke and quickly recovered on 1/20-21. That said, like a momentum oscillator can stay overbought in bull markets and oversold in bear markets, we should expect low readings in a bear market. This week only the AAII managers and AAII individual 8 week avg are at bearish extremes, and other readings have moved up with the market stabilizing after 1/20. 

Basic interpretation: bear extreme above major pivot support invites bounce; bit too optimistic too fast below resistance (ie indexes still below all pivots) invites another move lower. Right now we are not seeing extremes; I am wondering if put-call and ISEE daily readings and 10MA just a bit too high for this market, but the AAII readings may be enough to counter-act. So not much edge this week. If any stock index clears its FebP then short term optimism warranted; if that doesn't happen, and sentiment continues to improve, then we could see another drop. Thanks for reading.