Wednesday, June 8, 2016

Adventures in Option-Land

Mid-week market update: I like to monitor the option market from a sentiment modeling perspective because, unlike surveys which can swing all over the place, the option market is a forum where people are putting real money on the line.

Even as the stock market has been slowly grinding upwards, the option market has been showing signs of skepticism. As the chart below indicates:

  • The market is overbought on RSI-5 and nearing an overbought condition on RSI-14, but...
  • The VIX Index, aka the Fear Index, has been rising for the last few days; and
  • The VIX term structure has also been indicating higher fear levels in the same time frame.

At the same time, standard measures of overbought/oversold and sentiment models, such as the CNN Money Fear and Greed Index, is showing a high level of greed, which is contrarian bearish.

What's going on? Is this just a sign that the stock market is climbing the proverbial Wall of Worry?

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