Sentiment Shift Shows Extreme Optimism in Options Buyers

“…momentum remains ‘alive and well’ for the S&P 500 Index (SPX – 7,230.12), based on my simple quantified measure of momentum. That is, the 10-day moving average continues to be supportive, with no closes below it since the crossover on April 1… The optimism we are seeing among short-term traders is aligned with price action and thus not actionable (yet) if you are looking to short the market. At the very least, you would want to see evidence of slowing momentum, and that may not necessarily be a short signal as we learned last year.”  

- Monday Morning Outlook, May 4, 2026

My message last week was that momentum best describes the Standard & Poor’s 500 Index’s (SPX – 7,398.93) price action since the late-March trough. That message hasn’t changed, with the index closing 155 points, or 2%, above its 10-day moving average, notching its sixth consecutive week of gains.

In fact, the sharpness of the rally pushed the SPX into an “oversold” condition nearly one month ago, according to its 14-day relative strength index (RSI) reading. But last week’s upside action solidifies what I said last week when I advised that the 14-day RSI is a useless indicator amid a strong trend. In fact, the SPX has risen 5% in the three weeks since moving into “overbought” territory.

With the 10-day moving average sloping higher at the rate of about 23 points a day, it is projected to be around 7,360 by week’s end. As such, even if this week brings a 40-point drop, we would not be ready to declare that a momentum shift into lower gear has occurred.

The strong upside momentum in the SPX has generated a sentiment shift from extreme pessimism at the late-March bottom, to what has proven to be extreme optimism, as measured by option buyers on SPX components stock.

With short-term traders nearing an optimistic extreme, a shift lower in the momentum on display would not be all that surprising. But if a close below the 10-day moving average is imminent, it would not necessarily trigger a sell signal. With the SPX notching another all-time high, and pretty much going straight up since late March, it would take a lot more than slowing momentum to unwind the optimism that has built up the past few weeks. The optimism will take on more meaning if the SPX’s technical backdrop begins to deteriorate. But for now, it may only be signaling that an eventual shift lower in the rate of its ascent.

It is anyone’s guess where sellers may finally begin to overwhelm buyers. A potential resistance area could be in the 7,500-7,530 area. The 7,500 mark is a clean round number and 7,530 is exactly 10% above last year’s close. As such, anyone anchoring to the SPX’s year-to-date gain may look to slightly reduce risk.  Round-number percentage levels often represent hesitation or pivot levels, and there is likely a psychology around this phenomenon.

Not to be lost in last week’s price action was encouraging headlines from the White House that a deal with Iran to end the war could be near. However, no such deal has been reached and this is why we see what appears to be institutional market participants consistently using SPDR S&P 500 ETF Trust (SPY – 737.62) put options to hedge against a vicious reversal that mirrors the multi-week rally.  

We are also seeing an increase in the number of call options purchased on Cboe Market Volatility Index (VIX – 17.19) futures, with the 20-day buy (to open) call/put ratio above 4.0 for the first time since January. This has preceded an eventual decline in the SPX as the VIX rose.

Historically, a high rate of call buying has preceded advances in the VIX and SPX weakness, so this is something on our radar, as the timing isn’t exactly precise when VIX call buyers are hinting at higher volatility ahead. It is on our radar, nonetheless, but we don’t see anything actionable yet because the SPX has not showed signs of cracking from a technical perspective.

Stay bullish, and perhaps consider a hedge only if the SPX’s momentum begins wavering.

Todd Salamone is Schaeffer's Senior V.P. of Research

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