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Investor Sentiment and Other Reliable Indicators Suggest Stock Market is Skating on Thin Ice

Investor Sentiment and Other Reliable Indicators Suggest Stock Market is Skating on Thin Ice.  We use investor sentiment as a contrarian indicator. Although the DJIA, S&P 500 and the Nasdaq Comp hit new highs, sentiment and other reliable indicators are telling us that the stock market is skating on thin ice.   For instance, the broad Russell 2000 hasn’t hit a new high since August. Moreover, more Nasdaq and NYSE stocks declined than advanced during the past week. In addition, most of the 45 major market sectors are overbought. This is another sign the market is very risky and could be set for a downturn (see Chart of the Week).

Meanwhile,  the  Investor Intelligence poll of stock market newsletter advisors reports the spread between bullish and bearish sentiment among the advisors expanded for the sixth week in a row, ending at +40.1%, from +39.7% a week ago (see chart). That equals the reading in late July prior to the big August downturn.  Historically readings above +40%  call for defensive measures. Bullish sentiment slipped slightly to 57.2%. However, counts above 50% call for caution and this third week above 55% signals the need for defensive measures. As for bearish sentiment, it dropped to 17,1% from 17,9%, yet another contrarian warning indicator.

Investor Sentiment and Other Reliable Indicators Suggest Stock Market is Skating on Thin Ice
Investor Sentiment and Other Reliable Indicators Suggest Stock Market is Skating on Thin Ice

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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.

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