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),
- 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.