Here’s one positive indication on current markets

Nice reversal on yesterday’s trading action (Wed. April 4th). That looked a lot like a bullish engulfing candle to me. Add that occurrence to the recent signal coming from many sentiment indicators, as discussed below.

Sentimentrader.com has an incredible collection of sentiment indicators, shown with a fair amount of back tested history on those indicators. As you probably know—sentiment indicators are typically contrarian indicators. That is, if too many investors are bullish, it’s a bad thing, – and vice versa. There are lots of ways to quantitatively measure investor attitude. Sentimentrader follows the movements and attitudes of:

  • commitment of traders (commodities),
  • breadth,
  • options,
  • mutual fund flow,
  • institutional flow
  • short sales,
  • odd lots,
  • investor sentiment surveys,
  • volatility statistics,
  • optimism surveys,
  • insider trading,

 

This index- shown below- is computed by looking at how many of this huge collection of indicators they follow are showing extreme readings of pessimism vs. optimism. This gives us some indication of the attitude of institutions, traders and small investors for the broader stock market. Indicators reading “neutral” are not counted. The net extremes (bullish or bearish indicators) are tallied, and you get a reading on the chart. A reading above the green horizontal line is bullish.

As you will note on the chart below, the indicator flashed “bullish” (i.e. net more pessimistic sentiment readings) during the low points of the 2010, 2011, 2016 bear markets. These signals corresponded with the lows of those corrections. BTW—I blogged on the patterns leading into the 2010 and 2011 corrections here.

Sentimentrader’s compilation shows us pretty clearly that things have gotten “too bearish” in investor optimism. And that, ironically, is bullish. Of interest to readers who have followed my work for a while–the smart/dumb money spread (my personal favorite) is well into “buy” territory. Smart people like this market, Retail (dumb) money are selling like it’s the apocalypse.

It should be noted that extreme market selloffs like those seen in 2000, 2008 can exhibit prolonged readings of excessive pessimism by sentiment indicators. So the compilation is less useful at pinpointing a bottom during such massive corrections. But for shorter termed corrective periods like those noted on this chart – the signals are excellent. It is my opinion that this signal may indeed suggest a potential for a neartermed rally on the markets. And that lines up perfectly with my thesis – discussed in the above noted blog – that the real bear market show will occur sometime after the spring.

10 Comments

  • I watch the 52 week highs/lows on Stockcharts pretty much every day. And today the highs outnumbered the lows for the first time in many days. It’s not a sophiisticated idicator I know but it seems to me you can’t have a bull market when there are more lows than highs. I took from this that maybe we are through the spectacular rough patch of the past few weeks. This was before I read your blog that also suggests that the bull is intact. At least for now.

    Reply
    • Yes, that’s the point of the NHNL indicator– thanks for noting that for the readers Fred–the new high low indicator for the NYSE is something I watch. Its part of the Bear-o-meter.
      BTW–I plan on doing a tally of the Bear-o-meter soon and will write about it on the blog-probably next week.

      Reply
  • As I read this Trump is considering another $100 billion tarrifs on China. Time for Gold.
    PS: just bought your book Sideways. Good luck everyone.

    Reply
    • From everything I have seen about Trump, he is no dummy (horrid personality aside). It will be interesting to see if these tactics are ultimately about bringing the Chinese to the table to deal. He was a deal maker in his business career–The art of negotiation is to start too high, put fear into your opponent, and then get “talked down” to what you really hoped for – with them walking away feeling they got a good deal only by not getting as big a shaft as was originally proposed. Alternatively- a bad deal maker starts with what he/she wants, which can often result in getting less than that through the negotiations….
      So let’s see if that’s the case…meanwhile, I just watch the S&P’s support at 2580 and don’t make suppositions on what will happen unless that breaks.

      Reply
  • Just bought a copy of Sideways.
    What do you think of ZUB? Really frustrated by the volatility of the markets. Would you sell it next week when the bank earnings are out or continue holding until the end of the seasonality? Right now, I am break-even, no profits at all. Thanks.

    Reply
    • We hold ZUB in our equity platform. Like you, we are flat on the trade–seasonal trends are bullish until June, and the chart has not broken down. ZUB is down to support (prior breakout) so we will hold it for at least the next few weeks. It may rally with the market.

      Reply
  • I once took a course on negotiation and your description is “negotiation 101”. Trump is just particularly good at it. Actually,negotiation is kinda fun…unless you have a lot of skin in the game.

    Reply
  • Given the recent reporting of US major banks better than expected earnings resulting in share price increase, why is ZUB underperforming?

    Reply
    • The banks declined with the rest of the market. Take a look at the individual components of the index (ZUB) and you will see BAC, MS, JPM, etc all down from their highs. so its a market thing, not a sector or stock specific problem. If you believe as I do that the market has a few % points up left in it over the next few weeks, the banks will drag along with the market. In fact, the big banks are pretty much akin to an index themselves given their significance to the economy etc.

      Reply

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