Pierre Bernier has kindly sent me a year end update for VIXEE which was featured here last August. VIXEE is essentially 2CS with Bernier using the current VIX (I use VXO for continuity in my manual spreadsheet from 1996) and ISEE's new or opening put/call ratio while I use CBOE combined put/call (all position volume). They are quite similar in signal output.
If you look at the chart from the 2007 top you will see again that both 2CS and VIXEE have re-visited levels which have resisted further price action during this decline to March 2009 and up to last week. For 2CS that is the 70 level and for VIXEE 14% on the scaled chart:
During the bull market up to June 2007 sentiment was quite bullishly brisk. 2CS readings were often under 70, 60 or even rarely under 50, and as August's chart from Pierre Bernier showed, VIXEE was often under 10% (scaled) from 2005-07. In fact, as I wrote recently under the gold post, sentiment was generally very brisk all the way from mid 2003 to mid 2007. What's more, this tendency for 2CS to fall into and below 70's was true of the entire bullish period from 1996 to mid 200o! So 40's, 50's, and 60's are typical 2CS readings at bull market rally tops, and mid 70's are typical at bear market rally tops. 2CS was 72 at the May 2008 rally top.
During the bull market up to June 2007 sentiment was quite bullishly brisk. 2CS readings were often under 70, 60 or even rarely under 50, and as August's chart from Pierre Bernier showed, VIXEE was often under 10% (scaled) from 2005-07. In fact, as I wrote recently under the gold post, sentiment was generally very brisk all the way from mid 2003 to mid 2007. What's more, this tendency for 2CS to fall into and below 70's was true of the entire bullish period from 1996 to mid 200o! So 40's, 50's, and 60's are typical 2CS readings at bull market rally tops, and mid 70's are typical at bear market rally tops. 2CS was 72 at the May 2008 rally top.
Surprisingly, however, 2CS touched 64 on December 24's New York close, so we are facing a potentially tantalizing test of sentiment versus market price. Are we really just in a bear market rally since November 2008 or March 2009? Or is this a new bull market like from October 2002 or March 2003 to 2007? (I do not wish to debate Elliott wave or other interpretations of bull and bear markets at this point, but over four years of a rise with a new all-time high in some markets into 2007 or even 2008 would traditionally be judged a bull market.) SPX has re-traced 50% of its loss from 2007 to 2009. Current sentiment levels, as measured by VIXEE and 2CS, are historically associated with bear market rally tops, and we have a seasonal tendency for US stocks to decline in early January. On those grounds alone the markets "should" go down from here.
Does reaching 64 for 2CS this past week indicate that we are in a bull market and that even a 10% decline now in INDU or SPX would not be the end? Of course one cannot build an entire "guaranteed" market scenario based upon just one indicator. However, 2CS and Bernier's VIXEE have performed very well over many different market environments. Also, do take a look at Carl Futia's year end sentiment analysis and evaluation.
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