Feeling Sentimental About The Bull Market Days? FEAR NOT! The Bottom Is Closer Than You Think!

June 22, 2022No Comments

Hello, and Welcome to the Smart Money Dumb Show and I am your host as usual, Keith Richards. I’m president and chief portfolio manager of ValueTrend Wealth Management and I’m a technical analyst. Today we are going to talk about my favorite aspect of technical analysis, and that is sentiment analysis. So sentiment is one of those things that is used as a backdrop. If you’ve taken any of my courses or read any of my books, you’ll know that I always say it’s trend first. We look at things like the highs and the lows and the formations in the market and moving averages and that kind of thing to get a flavor for where we are in the market, but sentiment can give us a heads up and it can also appear at key inflection points on the market. So it can be a leading or a coincident indicator.

There’s lots of sentiment indicators. Some are better than others. And today I’m going to go through a few of them because I think you’re going to find this interesting. I’ve actually seen that the market appears to be nearing the bottom of the current bear market. Now we’re not there yet, so just to set the record straight, but I think we’re pretty darned close and I’ll show you why. So let’s go right to share screen and get on with it. So let’s get sentimental. Do you remember the good old days when markets weren’t going down? So let’s start off with getting a backdrop of what the markets are doing. Now, I could show you a market chart, but you probably don’t need to see that. Markets are going down. This is the 17th, I believe it is, of June and what we have seen in the past number of days, most of this week in fact because it’s Friday the 17th, has been a big drop on the market.

So this is the percentage of stocks that are above their 200 day moving average. Now this is not a sentiment indicator. This is a breadth indicator. Breadth is a measurement of participation on the market. So it’s, in this case, the participation of the number of stocks on the S&P 500 on a percentage basis. So if a hundred percent of the stocks on the S&P 500 were above their 200 day moving average, the line would be way at the top here. That never happens. You have always got some stocks near the bottom or well below, I should say, the 200 day moving average. And if very few stocks are above, as a percentage of the S&P 500, if very few stocks are above their 200 day moving average, then we see this line move down. Now I’ve drawn a couple of red lines and the red lines tell you, or at least give you an indication of when there’s too many stocks above the moving average, as you can see here.


So we were in that situation through much of 2021. And then you can see when there’s too little stocks. Now there’s extremes. This is going back to 2001, 2002 crash. And you can see that back then, if you were to look across here, it was about 12% of the stocks were above their 200 day moving averages and the balance of the S&P 500 stocks were below their 200 day moving averages. So it was an oversold market. And of course the market, as everybody knows, reversed after the 2002 lows and went on to new highs This is the 2008, 2009 crash. Now this was an extreme. We were looking at an actual potential for a banking collapse, and there was just like a shrinking economy. That kind of thing. One of the worst crashes, if not the worst crash in history, with the exception of 1929. People were leveraged, walking away from houses in the United States, bankruptcies everywhere.


It was a disaster. So of course, the number of stocks above their 200 day moving averages was at an all time low. And that was really down to around 2% of all stocks trading on the S&P were actually above their 200 day moving averages. Most everything was down. So we’re in that kind of situation now that’s close to the ’02, ’03 area where the number of stocks above their moving average is about 12 or so percent of the S&P 500 stocks are actually above their moving average. The rest of them, you know, the other 78%, or whatever it works out to be, are below the moving average. And that’s typically a sign as we saw, for example, in the COVID crash or the late 2018 crash. Does anybody remember the December crash of 2018? So often when you get these levels, the market is showing us that there’s not enough participation and the market is in sell everything mode.

And if you were to look at kind of a broad breadth indicator, and I’m not here to talk about breadth, you would find that there’s an awful lot of stocks that have been selling off. So the market, this indicates the market, participants are selling everything. They don’t even care what sector. At first, we were selling the tech growth stocks, the NASDAQ and whatnot. Now it’s everything. Throw everything out including the baby with the water. So this is the first of our sentiment indicators. Soi our backdrop is the market is in sell everything mode. So does that mean it’s time to buy? Well, let’s take a look because here we have the American Association of Individual Investors and you’ll have to pardon. I left my windows open because it’s a nice day and I wanted the breeze, but you may hear the odd truck go by.


So the American Association of Individual Investors surveys their members to find out how bullish or bearish, and this is only the bears. So this is not taking into account how many bulls there are in the survey. And you can see in extremes like in 2008 and like in 2002, the number of bears is off the chart. So I’ve drawn some lines and say that, you know, when there’s too many bears then this is the level. And there’s too few bears, meaning the markets could be overdone, then it goes down here and you can see the too few bears did line up with this peak and often does line up with market highs. And in fact, we’re in the area where we’ve got too few bears, meaning there’s too much pessimism and believe it or not, that’s a good thing.

You need a washout, a capitulation, a great fear trade to take advantage of market bottoms. So we’re setting up for that is what I’m trying to show you. I’ve got lots of evidence here. These indicators that we’re looking at are not things that you need to act on today. In fact, we could see some more downside. Anybody that reads my blogs regularly knows I’ve been looking for 3400 or 3500 on the S&P 500 and we’re not quite there yet. The point I’m trying to make is not run out and buy today, but start looking and paying attention because we’re closer to the bottom than we are to the top. So put to call ratio we’re starting to see spikes into that zone where there’s too many puts being bought versus calls. People buy puts because they’re scared. It’s protection against the stocks you own.

So you buy a put so you can sell it at a guaranteed price later when you think the markets are going to go down so you want that protection. So again, it’s a indication that people are too scared. This is the National Association of Investment Managers, people like me. And even though I like to think that I can be a little bit more right than many managers out there because of technical analysis and my study of sentiment, the average investment manager is a crowd follower and they tend to be underexposed to equity when things are bad and overexposed when things are good. And that’s great, except for one problem, the one time to buy stocks, the best time to buy stocks is when things are really bad and everybody’s depressed. So you’ll notice that again, in the crash of 2020, in the pullback in 2015, some of you might remember that. Even at the end of 2018, you can see they were not to my line here, but they were becoming underexposed.


Of course, if you remember, those old dogs out there who survived the ’08 crash, you’ll remember that there was a subsequent correction in the summer of 2011. And as you can see, here’s June, it was around August actually that correction was about 20 odd percent. And you could see investment managers then became underexposed to the market right after a 25% crash. And, of course, during the ’08-’09 crash investment managers were underexposed. So we were seeing overexposure during 2021, and now we’re seeing under exposure. And that, again, is a good indication that the average investment manager is typically wrong. So they’ve been a little bit too bearish for their own good. So let’s take a look at another slide. This is the VIX. A lot of you know what the VIX is, the volatility index.

It measures the actual premiums you have to pay on options and the more premium that a writer of an option demands, that indicates that they’re expecting more volatility. So they want more premium for the time that they have to honor the option. So you can see here that we’re not in my buy zone. My buy zone starts at around 35, but boy, are we ever playing with it? So watch the VIX. If it starts hanging out over 35 for any period of time, you’re probably looking at one of these periods, as you can see through time, which has marked the ’09 bottom, you know, even the ’01 bottom and whatnot, ’02 bottom, I should say. Lots and lots of times, the 1998 Asian contagion crash. So VIX spikes happen quickly. There’s the 2015 market sell off. It was one quick spike and then bang, back down then again.

So we wanna watch the VIX because if it gets over 35 and stays there for even a day or a week, you’re probably looking at that as a very sharp signal for the market’s selloff to be at or near an end. CNN, I talk about all of this stuff, by the way, in my book Smart Money, Dumb Money. And you can look that book up and you will get an idea of all kinds of sentiment indicators. That was, this was my piece de resistance, or whatever the expression is, on sentiment. And I covered an awful lot of sentiment indicators in that book. So CNN was one of the things I covered. It’s available free on their website. And they look at things like the put to call that we just talked about, but they also looked at junk bond or high risk bond purchases.

And if they’re falling, that means that the premiums on these high risk junk bonds are indicating there’s a lot of fear. People don’t want to take risks. There’s a number of different indicators in this index by CNN that I don’t cover in my own work so I often look at it and you can see they are looking at extreme fear. So again, lots and lots of indicators out there showing us that there’s too much fear out there. This is the big one from sentiment trader on the S&P due to optics which their optics cover everything. So they took all their different sentiment indicators on the S&P 500 and they bunch ’em together into one indicator and it gives you a pretty good idea. You can see it’s been pretty darn accurate. Like if we look at the crash in 2020, it went into the buy zone.


If we look at the crash at the end of 2018, the sell off 25%, pretty good lineup there. You know, often when it goes extremely deep, like it did in 2015. Here, you know, it gets deep. So lots and lots of opportunities there. Of course, throughout the 2008, 2009 crash, it was deep. So we’re in that zone where a whole mess of sentiment indicators are screaming that people are too fearful and that, believe it or not, is a good thing. So we’re set up for this market to bottom, perhaps not today, but way earlier than I think some people are expecting. One last thing I want to talk about, this is a type of sentiment. It’s not individual investors, but it’s actually the smart money and it’s corporate inside buyers. And you can see this is for the S&P 500.

So it’s like a lot of the companies that are listed on the S&P and they have to report whether they’re buying or selling stocks. And you can see that we’ve come off of an area like they were not buying. Look, they were below the buy, like the good line. During 2021, they were actually selling. They were taking profits, but now they’re buying back again. They’ve been buying back and they’re heading towards that point where, you know, for example, here, right after the 2020 crash, they bought like crazy. Okay? So sometimes when you start seeing these market bottoms, you’ll see the insiders stepping in, okay? 2011 selloffs they were stepping in, right? So we’re seeing some signs that the insiders, these people that know better, they know their company’s best. They see value and they’re starting to buy. So we ought to pay attention to these smart investors.


They’re not necessarily uber accurate market timers, but the point is it’s a leading indicator and most of these things that I’m showing you today are leading indicators. So let’s just, quick summary, sell everything is an attitude usually seen as the market gets closer to the bottom, not the midpoint. Okay. People think we have another zillion percent to go on the S&P 500 and they’re probably mistaken because the signs are that we are way closer to the bottom than a lot of people think. 12.5% of stocks are above the 200-day moving average on the S&P. That means there’s a whole lot more that are below. So that’s a condition, if you ever take my technical analysis course, that’s a condition I look for. If you’ve got a big gap below the 200-day moving average, that means the market’s oversold. The sentiment is a leading indicator, but it can also be a confirming indicator.


In other words, some of those sentiment indicators like the VIX and the put to call can happen right at the point of a bottom. So keep an eye on those two in particular for the minutia of timing, but the bigger picture stuff like the corporate buyers and stuff, you know, you really want to see those lines move into their preferred, you know, green zones. Insiders are buying and all of this to me says we are near a bottom. I want to talk about something really quick. I talked about this in our last video, but we were amongst the very early birds to call that this market would move out of a bull and into a bear. You know that if you read my blog and watch these videos. Well, now I’m making a statement and the statement is that it’s not yet, but it’s getting really, really, really, really close to that time.


I’m talking probably before the end of this summer, which in the grand scheme of things is a short period of time, that we’re gonna have an opportunity to be buying stocks. Heck it could happen a month from now. I’m not making any predictions. But what I am saying is that it’s way sooner than you think. So active investing, we’re proving it, outperforms the market, and you can see the green lines. This is only to the end of May. Craig was just in my office telling me we’re pretty close to break even on the year. We don’t have this small, where’s our one year, we don’t have this this monstrous out performance anymore, but the market is way down here and we’re kind of flattish right now. He was just saying that as of today, which is the 17th of June, we’ll see how the month finishes, but whatever the case, we’re preserving capital when the market is down in a huge way, right now, as I speak and we’ve been outperforming the markets when markets were doing very poorly. Market is the gray line here.


So again, these figures are only to the end of May and they are gross, which means the fees haven’t been subtracted. But if you know anything about our fees we still put you way ahead by paying us to not lose you money because our fees are a maximum of 1.75% on our equity platform. So active investing, whether you hire someone like us or you do it yourself, it’s important in this market. And what we’re talking about today is seeing an opportunity approaching. And if you didn’t have a strategy where you raise cash and accepted that we were entering into a bear market then you don’t have the cash to buy into this bottom that’s very likely to come in the next couple few months or so. Again, don’t hold me to any time period, but you need cash right now because the bottom is closer than you expect. Thanks for watching.


Never miss another video!

Get Smart Money Dumb Money videos delivered directly to your inbox.

Recent Posts

Keith's on Demand Technical Analysis course is now available

Scroll to Top