Follow the Money: Stock Sentiment

The following series measures the ratio of stock prices per near-term volatility (risk). Stock inflows pushing the extremes are indicated by reading in excess of +/-1.96 sigma.

Yesterday's reading was 2.43. This reading pushes far out into tails of a normal distribution. The statistically inclined readers know that this is a rare reading.

A word of caution, the value of such analysis depends on studying extremes relative to multiple time frames. The 2010 extreme has yet to match the multiple time frame extreme of 2004. This opens the door to further advances as long as “cannot lose” optimism exists.

At this point, the greater fool theory trade hopes that statistically extreme - 2.43 become even more extreme – say 3.00. This, however, would be a low probability events that few disciplined traders would chase.

NYSE Composite to VIX ratio:


Source: en.wikipedia.org