Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stock Market Let’s Not Get Too Optimistic!

Stock-Markets / Stock Markets 2012 Jan 28, 2012 - 02:56 AM GMT

By: Sy_Harding

Stock-Markets Best Financial Markets Analysis ArticleIn investing much is said about the folly of following the crowd.

It’s voiced in age-old maxims like “The market will do whatever it must to fool the majority”, and Warren Buffett’s advice to “Be fearful when others are greedy, and greedy when others are fearful”.


It’s measureable in investor sentiment statistics, which clearly show that investors tend to be overly fearful and pessimistic at market lows, not willing to participate when the market turns up, and then overly bullish and confident at market tops, not believing a rally has ended.

The current rally has been underway since October 4th. The S&P 500 has gained 21% in the four months since, which would be an impressive gain for a full year. Is it getting a bit ahead of itself?

Investors are finally catching the fever. This week’s poll of its members by the American Association of Individual Investors shows 48.4% are bullish and only 18.9% bearish. Those aren’t extreme readings, but are clearly opposite to the sentiment in late September, just before the rally began, when it was the bearish percentage that was at 48% and the bullish percentage at only 25.3%.

The VIX Index, also known as the ‘Fear Index’, measures the sentiment of options players, another meaningful method of measuring sentiment. It was at 42.9, historically a high level of fear by this measurement, in late September at the market low. Fear has declined significantly as the rally off the October low has progressed, with the VIX Index now at just 18.6, in the zone of low levels of fear, high levels of optimism, usually seen at rally tops.

So, is it time to take profits from the rally, or even take downside positions in anticipation of a correction?

In that regard, I like another of Warren Buffett’s insights regarding not following the crowd, “You are neither right nor wrong just because the crowd disagrees with you. You are right because your data and reasoning are right.”

In other words, plan to sell when others are greedy, but investor sentiment alone cannot be used to tell you greed and optimism are so high that a top is due. Sentiment can only be used as an indication that ‘the crowd’ is becoming bullish or bearish enough that it’s time to keep a close watch on other data and indicators.

When I look at other data and indicators my work includes a considerable amount of technical analysis. That is, whether a market is potentially overbought or oversold, is near potential support or resistance levels, whether money flow into or out of the market has reversed, and so on.

So, while investor sentiment reached overly bearish levels last September, my other indicators did not trigger their buy signal until mid-October. Shortly thereafter changes also seemed to take place in the fundamental conditions, most notably increasing signs that the U.S. economic slowdown of the first half had bottomed and the recovery from the ‘Great Recession’ of 2007-2009 had resumed.

And now, with investor sentiment recovered and reaching toward being overly optimistic, is it time to consider the potential for at least a pause in the rally?

We can look at another troubling condition. The enthusiastic buying in January has the market again spiked up into a potential short-term overbought condition above 50-day moving averages, to a degree that often brings a decline back down at least to the m.a. That would be a decline of 5 or 6% - if it halted at the moving average.

Then there is the history of February often being a negative month.

My intermediate-term technical indicators remain on their October buy signal, and the market’s favorable seasonality does not usually end until April or May.

But the high level of investor bullishness, and short-term overbought technical condition, indicate it may be time to temporarily take some profits from the rally.

That does not change my overall outlook for the year. If a short-term correction does develop it will be accompanied by gloom and doom predictions of something worse. But my work tells me the rally would likely resume to new highs by the end of the market’s traditional favorable season in April or May. Only then am I expecting a more serious sell-off, sometime in the unfavorable summer months, from which profits can again be made from downside positions.

But anything can happen, and in the interest of risk management for now it’s probably at least a time for caution, on the potential for a pullback at least sufficient to cool investor sentiment off to some degree.

Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.

© 2012 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in