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ChartBrief 121 - Euphoriameter moves into a new phase

The Euphoriameter rose again in July, with the combined sentiment reading for the S&P500 lifted by rising forward PE ratios, a low VIX, and rising levels of bullish sentiment in the surveys. The chart will probably trigger memories or comparisons to the 1990's because aside from the surge coming out of the early 2000's bear market, the last time we saw such levels was the late 90's into the tech bubble.

Indeed, usually you look at sentiment indicators as a source of contrarian signals, but bullish sentiment can feed on itself and produce a powerful dynamic which creates the momentum that ends up taking the market to even higher highs. But as I've said before, as valuations move higher and bullish sentiment builds, implicit in this is increasingly higher expectations, and the more bullish the expectations the greater the risk of disappointment.

The Euphoriameter has risen decisively to a new post-crisis high on the back of ever loftier forward PE ratios, falling VIX, and rising bullish sentiment.

Bullish and neutral sentiment have been a mirror image, and time will tell if more of the neutral camp become converts - indeed that will also have a large bearing on how the bull market plays out from here.

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