Let’s take a look at one of my favorite sentiment indicators to judge just how aggressive stock market bulls are so far this year.
To do this, I compare Nasdaq futures and S&P 500 futures. Specifically, I divide the current price of the former by the current price of the latter. This creates a ratio line that displays the relationship between these two markets.
Here’s the chart I’ve put together for this comparison:
Here you’ll see Nasdaq futures in green, S&P 500 futures in orange and the ratio line in yellow. The vertical line marks the middle of last November, when the most recent rally began.
Both markets – Nasdaq and S&P 500 – have gone higher since mid-November, but the S&P 500 is doing relatively better. For one, it has made a new high, eclipsing the mid-September high of 1,462 by about 2%. Nasdaq futures, on the other hand, have not yet traded above the recent high of 2,866.
Also, the ratio line (in yellow) has been declining since mid-November (since September, in fact). This indicates that the S&P 500 has outperformed the Nasdaq.
And that’s NOT an overwhelmingly bullish sign.
Typically, in very strong bull market rallies, Nasdaq stocks will outperform S&P 500 stocks because they offer investors the opportunity for bigger gains. So when investors are very confident, and/or greedy, they buy Nasdaq stocks in leiu of S&P 500 stocks.
On the other hand, when investors are more cautious they opt for the perceived stability in S&P 500 stocks.
The market is going up now, so there’s no sense in fighting it. But stay cautious. I’ll keep a close eye on this sentiment indicator for signs of nervous buyers looking for a quick exit.
When I see it, I’ll immediately let you know.
If you haven’t done so already read the Survive & Prosper issue on “How the Chinese Government Created a Problem for Us”