Sentiment Analysis (31 January’21)

According to the recent market sentiment data, the options equity traders continue buying calls at an unprecedented rate, the leveraged ETF traders long exposure reached a new record last week, the hedging activity has been muted for the last several weeks, and the corporate insiders started to sell aggressively.

Options Equity Traders

The 50d moving average of the CPCE ratio (the Options Equity Put/Call Ratio) recorded the lowest reading ever last Friday: it reached 0.42 showing unprecedented complacency among the equity options traders.

Another options data point which illustrates how complacent the options traders are is the number of calls bought to open. The chart below shows a record call option buying activity last week. The chart breaks out puts and calls bought to open by option type (Equity, ETF, Index). The blue line is equity calls bought to open. Most of the calls were bought for stocks like AAPL, TSLA, MSFT, AMZN.

According to sentimentrader, the small option traders bought to open almost 90m of calls during the last 4 weeks cumulatively worth $44.4bn. This is the new record.

ETF Traders

According to the Rydex Leveraged Bull / Bear Ratio, the ETF traders have never been more bullish. The chart below shows the total amount of assets invested in the leveraged bullish funds (2x and 3x ETFs on S&P500 and Nasdaq), divided by the total amount of assets invested in the leveraged bearish funds. The ratio hit 50 last week showing extreme skew towards bullish positioning.

Hedging Activity

There are many ways in which an investor or speculator can hedge against a stock market decline, among them are buying put options, raising cash, buying an inverse exchange-traded funds, selling short a futures contract and buying credit default swaps. The sentimentrader’s Equity Hedging Index looks at each of those factors above and compares the current level to its historical average. The more each indicator shows hedging activity, the higher the Equity Hedging Index will be.

According to the Equity Hedging Index, the market participants are not actively hedging against a potential market decline.

Corporate Insiders

Corporate insiders are more bearish today than they’ve been in more than a decade. The chart below plots the percentage of companies with any director or officer transaction in a given month in which there were more purchases than sales. For the month of January to date this proportion is just 10.8%. That’s the lowest level of the past decade. To put the latest data in statistical perspective, it is 2.2 standard deviations below the 10-year average. The current reading is something we’d expect to see just 2% of the time.

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