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Category: Sentiment Updates

Investor Sentiment Turns Euphoric over Stock Market Outlook: Watch Out!

Investor Sentiment Turns Euphoric over Stock Market Outlook: Watch Out!  We use investor sentiment as contrarian indicators for the direction of the stock market. The Citigroup Panic/Euphoria Model of investor sentiment is yet another indicator that is warning the stock market is in dangerous territory (see chart).  The level of investor euphoria recently has been at its highest level in many years. Why is this important now?  This excessive euphoria comes at a time when many investors appear to be ignoring market indicators and bleak economic news signaling the stock market is seriously overbought, particularly after its recent  big surge since March’s low. So, what’s propelling investor to thrown caution to the wind? It’s known as FOMO. That means individual and many professional investors are operating on emotion despite all the warnings because of Fear Of Missing Out. Citigroup strategists explain: “We are concerned that thoughtful approaches are being overwhelmed by the need to at least keep pace with price moves. People are ignoring joblessness, trade friction, social unrest and risks that loom, including Covid-19 reinfection, the end of the bonus supplemental checks and the upcoming election.”

Investor Sentiment Turns Euphoric over Stock Market Outlook: Watch Out!
Investor Sentiment Turns Euphoric over Stock Market Outlook: Watch Out!

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Smart Money/Dumb Money Confidence Spread Flashing Stock Market Sell Signals

Smart Money/Dumb Money Confidence Spread Flashing Stock Market Sell Signals. SentimenTrader measures sentiment of so-called “smart and dumb” investors by a complex formula that differentiates the smart from the dumb by how they normally trade.  As you can see from the chart below there is a widening spread between recent optimism of dumb investors and pessimism of smart investors. That widening sentiment gap  puts the spread in negative territory. And that historically is a sell signal. This indicator is among a number of reliable sentiment gauges and other indicators we’ve talked about recently that also are flashing sell signals. So be careful.

Smart Money/Dumb Money Confidence Spread Flashing Stock Market Sell Signals
Smart Money/Dumb Money Confidence Spread Flashing Stock Market Sell Signals

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Low Put/Call Ratio is Indicating the Stock Market is in Dangerous Territory

Low Put/Call Ratio is Indicating the Stock Market is in Dangerous Territory. One of the most reliable contrarian indicators of future market direction is the put/call ratio.   That’s because options buyers are wrong most of the time.  The present low ratio is warning us to be very careful because most investors have become so bullish. They’ve thrown caution to the wind in terms of hedging against a downturn. The ratio calculates the total number of put options that small traders bought to open versus the number of speculative call options they bought to open. The lower the ratio, the less hedging and more naked speculating that they’re doing. As the chart below shows, the ratio is at its lowest level since November 2007.  Prior to the financial crisis that sparked a major stock market downturn. This is one of a number of indicators we’ve highlighted in LMTR  recently that is warning us the market is in a very precarious position.

Low Put/Call Ratio is Indicating the Stock Market is in Dangerous Territory
Low Put/Call Ratio is Indicating the Stock Market is in Dangerous Territory

I have also added the 5 day put ca.. ratio that is at a multi year low as well.

Low Put/Call Ratio is Indicating the Stock Market is in Dangerous Territory
Low Put/Call Ratio is Indicating the Stock Market is in Dangerous Territory

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Increasing Investor Optimism Puts Stock Market in Danger Zone

Increasing Investor Optimism Puts Stock Market in Danger Zone.  We use investor stock market sentiment as historically important contrarian indicators to determine where the stock market is headed. The indicators have proved to be particularly accurate as they move closer to extreme bullish and bearish levels. This week’s Investor Intelligence survey of more than 100 editors of stock market newsletters shows bullish sentiment among the editors moving into those higher dangerous elevations, close to what occurred before the downturn earlier this year.

Bullish sentiment increased to 57.7% after a small dip to 54.5% the week before. Investor Intelligence notes that bulls above 55% mean investors should start taking defensive measures for protection against a possible downturn. Those measures include tight stops at a minimum, and possibly selling shares with big gains. In other words: Don’t be greedy! That’s inevitably a loser’s game. We should also note that bullish sentiment signals even more danger the higher it gets over 60%. And that also signals the need to prepare for a market decline. Although there’s no certainty about when the decline will occur.

Meanwhile, the market surge trimmed bearish sentiment to 18.3% from 19.8% a week ago. Bearish sentiment below 20% is not favorable for longs.  The bull-bear difference expanded to +39.4%  from 34.7%. That’s the widest spread since January, and another reason for being careful (See chart below).

Increasing Investor Optimism Puts Stock Market in Danger Zone
Increasing Investor Optimism Puts Stock Market in Danger Zone

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Investor Sentiment on Stock Market Remains in Caution Zone

Investor Sentiment on Stock Market Remains in Caution Zone. We use investor sentiment as a contrarian indicator of where the market may be headed.  One of our favorite indicators is the Investor Intelligence poll of more than 100 stock market newsletters. The jump in Covid-19 cases sent the stock market lower last Friday. And that caused a small retreat for the newsletter bulls to 54.5% from 57.3% the previous week. That’s just below the 55% level which indicates investors should take defensive measures.  Nevertheless, bullish sentiment certainly remains too high to indicate a big rally lies ahead. In other words, at these levels, investors should remain cautious. Bearish sentiment was up slightly to 19.8% from 18.4%, Bears below 20% historically are not favorable for longs. Another note of caution comes from the bulls/bear difference, That’s despite the fact that it moved down to +34.7% from its recent high of  +38.9%. (See chart below).

Investor Sentiment on Stock Market Remains in Caution Zone
Investor Sentiment on Stock Market Remains in Caution Zone

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