Author: Brad Lamensdorf

Brad Lamensdorf, the founder and portfolio manager of Active Alts, is a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF. He previously managed a long-short investment partnership from 1998-2005 under the name Tarpon Capital Management. Earlier in his career Mr. Lamensdorf was an equity trader/market strategist for the Bass Brothers’ trading arm. He managed a short only portfolio in addition to co-managing a $1bil hedging program. He also served as in-house market strategist for the entire internal and external network of Bass Brothers money managers.

Sentiment Indicators Say Stock Investors Should Be Cautious

Short-term indicators of investor sentiment came in mildly bearish last week, pretty much unchanged from the week before. The Ned Davis Research (NDR) short-term sentiment indicator was at 60, slightly below the previous week. The CNN Fear Greed gauge was slightly higher at 72.

Intermediate indicators remain in bearish territory. The NDR Crowd Sentiment is at 68, down 2 points from last week but still too high from a contrarian point of view.

The Investors Intelligence Bull/Bear Ratio of sentiment among investment newsletter writers came in at 57% bulls and 18% bears, like the previous week. Used as a contrarian indicator, since these writers usually are wrong, this is another indicator that investors should remain cautious.

September 14th 2018 - Sentiment is a 72
September 14th 2018 – Sentiment is a 72

Sentiment Indicators Flash New Warning Signs for Stock Investors

Short-term and intermediate term measurement of investor sentiment about stock market direction jumped sharply higher into danger territory last week, flashing warning signs investors should be very careful. The Ned Davis research (NDR) short-term sentiment poll hit 67, while the NDR intermediate-term sentiment poll moved up to 69. Anything near 70 means investors should be very careful.  The CNN Fear & Greed Index closed the week at 73, also a clear warning sign.

Another warning for investors comes from the Investors Intelligence Bull/ Bear measurement of sentiment among investment newsletters. It turned outright bearish. Bullish sentiment among newsletter writers moved up to 60% vs. 18% who were bearish. Since these writers are historically wrong, the Bull/Bear poll also is telling investors to watch out.

Intermediate-Term Sentiment Indicators Flash Warning Signs for Stocks

Measurement of the level of  investor optimism for the short term moved slightly higher this week compared with the previous week. The CNN Fear & Greed Index moved to 61 while the Ned Davis Research (NDR) Short-Term Sentiment Poll was at 60. From a contrarian point of view that indicates stock market investors should be cautious but not overly alarmed for the near term.

On the other hand,  sentiment indicators on market direction over the intermediate term are flashing warning signs. The NDR crowd sentiment is at 67, which is quite high. The Investors Intelligence Bulls/Bears is at a very optimistic 57% bulls and 18% bears.  This puts the bulls/bears ratio at 40, which is in the danger zone.

Investors Intelligence Research -Reproduction and re-transmission of this report, and the data contained within, is strictly prohibited without prior permission.

3 Steps and a Stumble” Rule and Why Investors Should be Cautious

Famed market guru the late Martin Zweig noticed the market usually under performed dramatically over the years when the Federal Reserve raised interest rates three times during a given cycle.

Why?

  • Higher rates increase corporate financing costs, weakening earnings.
  • Rate hikes also increase investor margin expenses, which is particularly dangerous now when there has been a record amount of stock bought on margin.
  • The Fed raised rates in March and June this year following three rate hikes last year.

    The Fed says it will raise rates two more times in 2018.

    The chart from NDR shows when the 3 steps and stumble rule was followed by declines in the Dow Jones Industrial Average going all the way back to 1915.

    What does this all mean?

    The stock market could be overdue for a major downturn.

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