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Category: Sentiment Updates

Soaring Bullish Sentiment  is Warning Stock Market Could Be In For Rough Times

Soaring Bullish Sentiment is Warning Stock Market Could Be In For Rough Times. We use investor sentiment as a contrarian indicator of where the market is headed because the average investor historically is wrong. So what is worrisome is that this week’s strong stock market gains have driven up investor exuberance to the highest bullish levels since the fall of 2018, according to Investor Intelligence.  And that was followed by a deep dive that gave 2018 the worst performance in 10 years.  The Investor Intelligence poll of more than 100 newsletters reports that bullish sentiment climbed to 59.4% from 57.0% the week before. That was the highest level since its peak of 60% in September 2018. Bullish sentiment at 60% and higher historically means investors should be preparing for a market decline.

Meanwhile, bearish sentiment was virtually unchanged at 17.9% compared with the previous three weeks’ 17.8%.  However, the climb in bullish sentiment pushed the spread between bullish and bearish sentiment into the danger zone at +41.5% from 39.2% the previous week (see chart). Spreads above +40% signal investors should be taking defensive measures. Here’s another warning sign. The  latest rally caused another drop in newsletters projecting a correction to 22.7% from 25.2% and 27.1% for the previous two weeks. That’s the lowest percentage of editors projecting a correction since September 2018 when the level briefly fell below 20%.

Soaring Bullish Sentiment  is Warning Stock Market Could Be In For Rough Times
Soaring Bullish Sentiment  is Warning Stock Market Could Be In For Rough Times

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Sentiment Indicators Warning Stock Market is Still in Dangerous Territory

Sentiment Indicators Warning Stock Market is Still in Dangerous Territory.  We use investor sentiment as an important tool for indicating where the stock market is headed.  Despite the market’s recent tumble, indicators such as The SentimenTrader’s Smart Money/Dumb Money Confidence spread, are warning the stock market remains in overbought territory. In other words, this is not yet a time to buy. The SentimenTrader’s Confidence Spread has narrowed somewhat to  -0.31. This narrowing is from a recent extremely negative level of -0.61 (see chart), which forecast the downturn. However, the spread at -0.31 still is in negative territory as the smart money remains very cautious about intermediate prospects. In contrast, the dumb money remains overly optimistic, which is negative from a contrarian viewpoint because the dumb money historically is wrong.

Sentiment Indicators Warning Stock Market is Still in Dangerous Territory
Sentiment Indicators Warning Stock Market is Still in Dangerous Territory

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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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