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Category: Sentiment Updates

Investor Sentiment Has been Signaling Stock Market at Precarious Levels

We use investor sentiment as a contrarian indicator of where the market is headed. So, Investors earlier this week were getting increasingly optimistic about the market despite clear signs that stocks were becoming very overpriced. The more stocks become overpriced, the more they are subject to falling down for any number of reasons, including unforeseen events.. That’s something like a house built precariously on stilts in a danger zone.  Will it be wind, fire an earthquake or a hurricane? Or maybe a mudslide? . All we know is something could easily knock the stilts from under it.

As stocks rebounded early in the week, the Investor Intelligence poll of editors of stock market newsletters showed the editors were becoming very bullish. So, it is no surprise that later in the week, the market  took a big hit amid renewed coronavirus fears. Bullish sentiment among the writers increased to 57.3% from 54.9%. That’s a level that historically tells investors they should be prepared for a market slide. Bearish sentiment at 18.4% also meant investors should be careful.

Meanwhile, the bull-bear difference jumped to +38.9% from 36.3% (See chart below). That’s the widest spread since mid-January when it hit +41.5%. That’s also an increased call for caution. In other words: Be careful out there!

Investor Sentiment Has been Signaling Stock Market at Precarious Levels
Investor Sentiment Has been Signaling Stock Market at Precarious Levels

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Overly Bullish Sentiment Indicator is a Negative for the Market

Overly bullish sentiment indicator is a negative for the market.  We use investor sentiment as contrarian indicators for determining the direction of the stock market.  The latest reading from SentimenTrader’s Smart Money/Dumb Money shows the indicator going from extreme pessimism on market prospects before the big surge this year to the present bullish level, which is a sell signal. Or at the least, a signal  to be very careful.. 

Overly Bullish Sentiment Indicator is a Negative for the Market
Overly Bullish Sentiment Indicator is a Negative for the Market

 

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Investor Sentiment Gauges Have Been Suggesting Stock Market Top

Investor Sentiment Gauges Have Been Suggesting Stock Market Top.  We use investor sentiment as a contrarian indicator on the direction of the stock market because investors historically are wrong. Along with most of the  so-called stock market experts they blindly follow. So, one of our favorite contrarian indicators is the Investors Intelligence Bulls/Bears poll of stock market newsletter editors. Over the last several weeks we reported that the editors were becoming increasingly bullish.  And we pointed out that historically as the editors become increasingly bullish that triggers increasingly loud warning bells to start get your defensive ducks in order.

This week the Bulls/Bears indicator moved into danger levels. We never quite know when the market will turn following a buildup of such increasingly alarming warnings. But they should be heeded, as the big market plunge proved this week.

As you can see from the chart below, the spread between the bulls and the bears increased alarmingly this week as the bulls were ever more optimistic despite signs over the last few weeks that  the market had become very overbought.  The difference between bulls and bears jumped  to +36.3%, from +29.8% a week ago. That is the widest positive spread since mid-January, and just above the level prior to the late February market plunge. Like lemmings mindlessly nearing a cliff, the recent market surge moved the bulls up to 56.9%from 53.5% a week ago. At the same time, bearish sentiment fell to 20.6% down from 23.7 in the prior week.

Another warning sign from the poll was that only 22.5% of the writers  expected a correction. So, what’s the lessons here?  Go with the historically accurate indicators. Don’t become blindingly greedy. Ignore the ignorant herd mentality leading you and your wealth over the cliff. 

Investor Sentiment Gauges Have Been Suggesting Stock Market Top
Investor Sentiment Gauges Have Been Suggesting Stock Market Top

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Stock Market Sentiment Indicator Moves Into Cautious Territory

Stock Market Sentiment Indicator Moves Into Cautious Territory.  We use a number of sentiment indicators as contrarian guides on where the market is headed since investors inevitably are wrong.  One of our favorites is the Investors Intelligence bulls/bears poll of more than 100 newsletter writers. The latest survey shows that the difference between the bulls and bears expanded further, reaching +29.8%, from +26.7% a week ago. That is the widest positive spread since late Feb and is entering a level that tells investors to be cautious (See chart below). The bulls advanced to 53.5%, from 50.5% a week ago. That is approaching the 55% area that is suggestive of a potential trading top, last shown in  mid-February.. The bears barely changed at 23.7%, just below the prior 23.8% count. That is the lowest number since the first week of March, after readings below 20% throughout the prior year. In summary, this indicator is saying that the stock market may be moving into overbought levels.

Stock Market Sentiment Indicator Moves Into Cautious Territory
Stock Market Sentiment Indicator Moves Into Cautious Territory

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Excessive Optimism By Options Traders is Negative Short-Term Signal for Stock Market

Excessive Optimism By Options Traders is Negative Short-Term Signal for Stock Market.  We use a variety of  investor sentiment indicators as contrarian signals on the direction of the stock market.  Largely because most investors, including so-called “expert” money managers and brokers, usually are wrong.  One of the indicators we use is the Options Speculation Index.  This indicator looks at put vs. call buying as a measure of trader sentiment about where the market is headed for the short term. As you can see from the chart below recent trading pushed the index to an excessively optimistic level of 1.3. This chart shows the traders opened up 30% more bullish contracts than bearish ones. And that is a signal for caution for the short term from a contrarian viewpoint. You can also see that this kind of level of excessive optimistic trading has not worked out well in terms of median returns and win rates.

Excessive Optimism By Options Traders is Negative Short-Term Signal for Stock Market
Excessive Optimism By Options Traders is Negative Short-Term Signal for Stock Market

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