Thursday, January 23, 2020

#Sentiment Review $SPX

The old American idiom of a day late and dollar short is an phrase easily applied to majority's ability to time (buy or sell) US stocks. The majority, influenced more by instinctual behavioral tendency of the individual to seek acceptance of an emotionally-driven crowd than act independently in the minority, views rising and falling stocks prices as bullish and bearish. This tendency that drives them chase when probabilities favor fading relegates the majority as the consistent bagholders of history's panics and trend changes.

Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”, John Templeton

Subscriber Comments

The bears have been citing extreme greed (lack of fear) towards US stocks for months. They've been pounded by an aggressive rally to all-time highs over this period, so skepticism is warranted.

Extreme greed readings are easy to find and heavily cited today. Don't confuse frequent citation with efficacy. For example, the put call ratio is being called extreme by some. Hard to argue with the presentation. A concentrated but not necessarily extreme reading exists. Are theses readings reliable? Lots of good signals, but also many bad ones in which investors following them would have missed a strong rally. Long term review of put call ratio adds additional uncertainty as the lower bound of the ratio drops dramatically from today's trading range. Does the disciplined trader ignore data prior to 2008?

Put Call Ratio

There's no denying it. Investors are becoming more optimistic towards stocks. Eventually they'll become too optimistic/complacent. Subscribers should track the Weighted Average Sentiment reported in the Sentiment Model columns. Weighted Average Sentiment is reported as WASo and WAS1. WASo has been tested. It is not as reliable as the VIX Model, but complements it. Extreme readings (WASo > 0.75) tell us the majority is dangerously optimistic.

Follow me on Twitter or facebook for further discussion.


Market-driven money flow, trend, and intermarket analysis is provided by an Insights key.