Measuring Market Sentiment.
After last week’s unusual blog writing circumstances, I was musing on emotions and the role they play in life and in the markets. I read some articles, and this caught my eye:
Notably, we are in one of the longest stretches of more extreme bearish sentiment outside structural bear markets.
Really, I thought? Let me read more. It was illustrated with this chart:
Does the chart really show that?
Well, yes. The chart does show that. But is it reality?
According to the chart, investor (retail and professional) sentiment recently reached some of the lowest levels since the financial crisis. Who would have thought?
Is it justified? How do we measure it statistically?
There IS a measure: the z-score.
What is a Z-Score?
It is a standard statistical measure that indicates how many standard deviations a data point is from the mean of a dataset. It has been adapted for the stock market to be a measure of how bullish or bearish the market is. In other words, it tells you how far investor sentiment deviates from its historical average.
Sounds reasonable?
Not exactly. Being naturally suspicious, I started checking on what data they are based. There’s a formula (of course!)
How do we read it?
- Z > +2 → Sentiment is extremely high (potentially euphoric)
- Z < -2 → Sentiment is extremely low (potential panic)
- Z around 0 → Sentiment is average, near historical norm
So according to the chart we are below -2, in other words extremely low, possible panic. But before we sell everything and head for the hills let’s check a few details.
How reliable is the Z-Score?
Formulae and models are only as good as the data they are based on, so I started investigating the data sources.
Of the main 6 sources, only 3 were based on hard data – as in what people actually do rather than voluntary self reporting on what they think. The latter is NOT statistically valid. Here’s a list:
From my perspective (as an ex-statistician), only the CBOE comes close to being the data source that we want. So how does that look now?
CBOE Equity Put/Call Ratio
As of May 28, 2025, the CBOE Equity Put/Call Ratio stands at 0.58 — slightly below its long-term average of 0.60 — giving it a Z-score of –0.20, which indicates sentiment is well within normal bounds. Not extreme.
BUT – here’s what is interesting – the day before, it was 0.88, a sharp rise that briefly pushed the Z-score to +2.8, signaling a short-lived spike in fear-driven trading. Which IS extreme.
What happened?
An intraday spike. The same as on August 18, 2022, the CBOE Equity Put/Call Ratio was:
- Day 1 : 58
- Day 2 : 89
That’s a jump of over 50% in one session — driven by heavy buying of puts on a market downdraft.
Contrarian Investing
The theory is that when sentiment gets stretched too far in one direction, it tends to snap back. That’s the entire logic behind contrarian investing: buying when others are panicking, and stepping back when the crowd gets euphoric.
Using Z-scores helps quantify this. It moves us from “it feels bad out there” to “we’re two standard deviations from normal — that’s rare.”
BUT (a very BIG but)
We’re talking volatility on steroids!
The ratio can jump from ~0.50 to >1.00 in a single session, depending on whether traders pile into puts (fear) or calls (greed).
Here’s another example:
March 2020 crash: ratios spiked well over 1.0 repeatedly.
January 2021: ratios plunged below 0.40 due to heavy call buying. (remember GameStop mania?)
What does it all mean?
Don’t trust the headlines. They are after clicks. You can’t rely on them, as anyone who has read my books well knows. We have 2 takeaways:
- The CBOE put / call ratio is the only source you can rely on as a source for z-score – because it is the only one based on people’s actions, not their emotions.
- Z scores are enormously volatile. Don’t ever rely on a one-day score. Look at a moving average of at least 10 days.
To the markets . .
We’ve been in a consolidation pattern for 3 weeks now. The market can’t make up its mind what it should do. Every day the news about tariffs sends it this way or that, and it is getting tiresome.
SPY Charts
SPY has been trading so far in the range 575 – 595. The gap up on the 12th May has not been closed, so remains as a bullish signal – unless it is closed, of course. We could actually draw in a Darvas Box now.
Just to illustrate, here is a close up of the Darvas box. The top is 595 and the bottom is 575.
Long term chart shows nothing particularly interesting. The uptrend is still in place (green line), and the (possible) resistance line (red) has not yet been hit. But remember these lines on the chart are just lines on a chart illustrating human behavior – the market doesn’t know about them!
SPYG Charts
SPYG is exhibiting the same pattern as SPY, please read comments above.
And the same for the long term chart, other than that is has bumped up against the red resistance line and has not yet managed to get through it.
QQQ Charts
QQQ has the same pattern as SPY – but with one big difference: it is approaching it’s all time highs. ON 16th December las year it reached $538.17. On 19th February it slightly eclipsed that by closing at $539.52. Then, unfortunately it formed thee double top pattern, and retreated.
Here’s a slightly longer chart where you can clearly see the double top. And , of course, it has formed a Darvas box – for practise you can draw it in!
The longer term chart shows it hesitating at the uptrend support / resistance ( red dashed line) – as we predicted.
VIX Chart (Volatility)
The VIX is settling down and is now in low volatility territory (although it doesn’t feel like it!)
ITMeter
The week ahead . . .
It is too early to tell, the futures are not open. I am writing this early because I am in Paris – and there have been riots for the last 24 hours, and I have no idea what tomorrow will be like. I have never seen anything like it. Unbelievable.
This blog coming to you from . . .
Paris. Much more comfortable than the side of a road! Yes, I am back after my month in the country, which was wonderful. After 2 days the puncture was finally fixed (what a saga!) – I forgot to mention that the car (Lexus 450) doesn’t have a spare wheel otherwise I could have fixed it. There is some rubbish on the website that it has been designed to be able to be driven on a puncture. Hah! Well, not the puncture I had! How can they write this rubbish?
The noise and bustle of Paris takes some getting used to – does everyone drive with their hand on the horn? But I am writing this in the Bar or the Cercle Nationale Des Armees (long story) and here’s what is looks like:
Yes, that’s a kir royale! Sante! If you want to see more photos of where I have been here’s the link: https://www.facebook.com/heather.cullen.756/
Footnote: 24 hours later. for the last 24 hours Paris has been having riots. Unbelievable. It’s not the Paris I knew and loved. The noise is incredible, the streets for miles around are closed, there are armed police everywhere, doing nothing to stop the riots, just stopping people walking down streets. 240 cars have been burned, many people injured, at least 2 dead. I have just witnessed (from the safety of my balcony) around 200 motorbikes drive through Place St Augustin, up both sides of the road AND the footpaths, all revving as loudly as they can, all pressing their horn. The place is out of control! Civilization is skin deep. I have never seen anything like it.
Fingers crossed for a good week!
Heather
Trade the tide, not the waves
14 Responses
Hi Heather,
In Central Asia, the governments make the men shaving their beards because it can prevent terrorism and extremism. It is a good law. France and French people should protect their European way of life. Learn from Charlemagne and William II the Duke of Normandy and Joan of Arc and King Louis the 13th and Napoleon. President Macron needs to run for the third term in 2027 please.
Sincerely,
George Henry
Hey George – I think Macron may have an image problem after ‘le slap’ – and I can’t help wondering – what if it was a female president and she had been slapped by her husband? I think the outrage would have been much more extreme.
h
Hi Heather! Small follow-up question if you could attach excel or csv version of the ITM backtesting to the website — it is a bit painful to try to reconstruct it from a PDF export.
Sincerely,
V
Hi V
I don’t give out copies of working sspreadsheets – for historical reasons where people changed numbers and claimed I had ‘massaged’ the data. Which, of course, I hadn’t but I had to spend time tracking down the changes they had made to refute their claims. Too time consuming.
Easy to reconstruct, and make your own backtesting system. here’s the link with the instructions: https://heathercullen.com/backtesting/
Hope this helps
h
Hi V, I am trying to replicate the backtesting using data form Yahoo finance. But I haven’t finsihed it yet. It’s harder than I expected. Hopefully I can share what I find in the future.
Hi – yes, Yahoo are making it hard for people to scrape off their website.
I found a good way to get up to date, clean, back data just before I left – but I can’t remember – actually, I just did – it is through Excel. It was on the blog in this post: https://heathercullen.com/trading-the-vix/
IT saves heaps of time!
Hope this helps
h
Hi Heather! Hope you stay safe in Paris! It is crazy indeed!
I had a small question about maintenance margin. When I buy call options at interactive brokers, it still shows me 10% maintenance margin is required to keep my position, even though I paid it fully in cash. I wanted to ask if this is normal or can lead to a potential margin call and liquidation if a flash crash happens?
Sincerely,
V
Hi V
,
not sure how that is working – I closed my account with IB, I found them way too hard to deal with. If you have paid fully in cash for your option a maintenance margin should not be required – the most you can lose is what you ave paid for the option.
I certainly have been 99% invsted from time to time and have never been asked for a mainteance margin.
I know this is not helpful, but I would check what the rules and regs of your contract with them says – and possibly think of switching to another broker. I have used Schwab for many years, and have had only a few reltively minor problems over the years. I also use Firstrade. I am not recommending them or getting any sort of kickback – just telling you what I have found.
Hope this helps
h
Dear Heather,
Thank you for your weekly blog as always. Please stay safe in Paris. Speaking of France and also Germany and Italy and Spain and Portugal, these five countries need to get together and make each other great again similar to the Five English speaking countries of USA and UK and Australia and New Zealand and Canada.
Sincerely,
George Henry
Hi George – I don’t think Australia is exactly pulling its weight at the moment. I believe our hopeless, hapless PM is visiting the US shortly – and I expect that he will get asked to step up to the mark with defence spending.
Shold be an interesting meeting!
h
Of course the US press is silent, what is the rioting all about? First we have heard about it!
Stay safe please
Hi – the Australian press also silent, lots of coverage in the UK press – they love the French behaving badly!
Theoreticall, it was about a football match they won, but the riot started before the game did. More than 100,000 peopleflooded the city, and as I said in another comment, mostly young males wearing shirts saying ‘fly emirates’ or ;Qatar airlines’
I don’t think they were really celebrating France winning, just an excuse for a riot.
Sad
h
Sad to hear about the riots et al going on there in Paris, truly doesnt sound like the French folks that i have known and worked with over a very long career (software developer). Family and friends have just been through Europe and all have spent considerable time in Paris, and mentioned how much they enjoyed Paris among other places of course. Take care and be so very careful.
Hi Don – it wasn’t the usual people – evidently more than 100,000 people came into the city. Walking through them for many hours trying to get back to the hotel, I noticed thata they were mostly males, many had beards, and I would estimate that over 90% were wearing blue shirts that either said ‘Fly Emirates’ or “Qatar Airlines’. Evidently they wee sponsoring the game, but I did not see one person with the name of the football team, or France, or Paris.
Strange times indeed.
Today, all people gone, back to normal!
h