In 1996 when CBOE's VIX became more readily available to small private investors on the internet, I got interested in sentiment measuring. I started calculating the daily product of the two indicators: the CBOE VIX and the CBOE combined Put/Call ratio. I had noticed that sometimes one or the other of the two was the leader or more indicative of current sentiment, and it seemed logical to combine them. I soon decided on a five day running total of the product of the two numbers as being sufficient short both to center near price highs and lows and to register sentiment extremes fairly well. I still do the 2CS by hand each day as I still draw some graphics charts by hand, being a survivor from before personal computing.
The monthly chart of the SP500 since 1997 shows only the extremes of the 2CS Sentimeter (red) near those price extremes. We have had two bull markets since 1996, one nasty bear market and several crashes in both bull and bear markets. So I have developed a feel for this indicator.
I'll let the chart speak largely for itself except to point out the obvious. There have only been three greater extremes of bearish sentiment than our current reading indicated by the 2CS since 1996: the two bear market panic lows of 2002, the post 9/11/2001 panic low and the 1998 Russian default and LTCM panic low. Therefore I think this current episode qualifies as a panic even if it's only a 10% decline in most US averages. If one looks at the pattern of changing levels of the 2CS at successive highs and lows, I think there are some hints perhaps for the next few years. But I also think we can be pretty certain of making a good low and sustaining a good or excellent rally in the markets rather soon. It's possible we've already put in a low, but it's too soon to say on the basis of this indicator alone.
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