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Category: Sentiment Updates

Growing Bullish Sentiment is Indicating Stock Market is Getting Very Dangerous

Growing Bullish Sentiment is Indicating Stock Market is Getting Very Dangerous.  We use investor sentiment as historically accurate contrarian indicators of the direction of the stock market. So we’re not surprised the ongoing record-breaking rallies are making investors absolutely giddy.  As a result, blinding them to the evidence that the market is increasingly overbought. In other words, all that illogical optimism is pushing bullish sentiment to danger levels, from a contrarian viewpoint. For instance, The Investor Intelligence poll of more than 100 writers and editors of stock market newsletters reports bullish sentiment climbed  this week to from 57% to 59.4%. That’s the highest level since September 2018 when the bulls hit 60%. And that was followed by a major downturn that made 2018 the worst year in a decade for U.S. stocks.

Growing Bullish Sentiment is Indicating Stock Market is Getting Very Dangerous
Growing Bullish Sentiment is Indicating Stock Market is Getting Very Dangerous

Meanwhile bearish sentiment was virtually unchanged at 17.9%. Bearish sentiment under 20%  historically is not attractive for buying. With the increase in bullish sentiment, the spread between bullish and bearish sentiment expanded this week from +39.2% to +41.5% (see chart). Spreads over +40% mean investors should begin taking defensive measures.  Investors during big rallies lose sight of the fact that excessive investor exuberance.

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Investor Sentiment is Flashing Warning Signs for Stock Market

Investor Sentiment is Flashing Warning Signs for Stock Market. We use investor sentiment as an important tool for indicting where the stock market is headed. During the past week major sentiment indicators were flashing warning signs for both the short term and intermediate term. The SentimenTrader’s Smart Money/Dumb Money Confidence Spread shows smart investors becoming far less confidence in the market for the intermediate term. The dumb money is increasingly optimistic.  The spread between the two at -0.61 is at an extreme level. Historically that is very worrisome in terms of where the market is headed.

Investor Sentiment is Flashing Warning Signs for Stock Market
Investor Sentiment is Flashing Warning Signs for Stock Market

Meanwhile the short-term CNN Fear/Greed indicator (see below) is showing investors have become extremely greedy. As a result, that is a danger sign from a contrarian point of view because the average investor historically is wrong.

Investor Sentiment is Flashing Warning Signs for Stock Market
Investor Sentiment is Flashing Warning Signs for Stock Market

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Low Level of Short Interest in SPY is Negative for Stock Market

Low Level of Short Interest in SPY is Negative for Stock Market.  The short interest in the S&P 500 ETF (SPY), which tracks the S&P 500, is at its lowest level in two years (see chart). That means many investors who use this this instrument to hedge against  a market drop, have lost all fear of a downturn and see the market as continuing to move up.  Historically, that’s usually a contrarian indicator that there’s trouble ahead for stocks.

Low Level of Short Interest in SPY is Negative for Stock Market
Low Level of Short Interest in SPY is Negative for Stock Market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Extremely Bullish Investor Sentiment on Stock Market Flashes Danger Signals

Extremely Bullish Investor Sentiment on Stock Market Flashes Danger Signals. We use investor sentiment as a contrarian indicator for stock market direction, and here’s why we are concerned.  The Investor Intelligence poll of more than 100 newsletter writers reports bullish sentiment climbed this week to 58.9% from the previous 57.7%. That’s the highest level of bullish sentiment since the end of the summer 2018 when bullish sentiment exceeded 60%. And that preceded an October selloff in which the S&P 500 experienced its worst month since September 2011. Historically bullish sentiment above 55% is a signal investors take defensive measures, such as tight stops and possibly selling some shares with big gains, says John Gray of Investors Intelligence. Bullish sentiment over 60% signals even more danger.

Extremely Bullish Investor Sentiment on Stock Market Flashes Danger Signals
Extremely Bullish Investor Sentiment on Stock Market Flashes Danger Signals

Meanwhile, bearish sentiment increased slightly to 17.8% from 17.3% two weeks before. The difference between bullish and bearish sentiment expanded the bull-bear spread to +41.1% compared with the previous +40.4% (see chart). A spread above 40% calls for defensive measures. Similar spreads last July preceded the August selloff.  Another note of caution:  The number of advisors projecting a correction dropped to 23.3% from 25.0%. “Readings below 25% are worrisome,” Gray also adds.

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Investor Sentiment Signaling Stock Market on Thin Ice

Investor Sentiment Signaling Stock Market on Thin Ice.  The SentimentTrader Smart Money/Dumb Monday Confidence Spread has hit  a ten-year low (see chart), signaling a growing gap between how smart and dumb investors view the future of the stock market..

Investor Sentiment Signaling Stock Market on Thin Ice
Investor Sentiment Signaling Stock Market on Thin Ice

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The  smart money is becoming increasingly pessimistic about stocks rallying in the weeks and months ahead while the dumb money is becoming  increasingly optimistic that they will.. That is a clear warning sign that stock investors should be very cautious. Another sign of caution comes from the equity put/call ratio (detrended), which looks at the ratio’s 10-day average relative to its 26-week average. The ratio is now at its lowest level since January 2018. Stocks tanked and the VIX spike the last time this ratio was this low (see  chart)..

Investor Sentiment Signaling Stock Market on Thin Ice
Investor Sentiment Signaling Stock Market on Thin Ice

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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