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Investor Sentiment Gauges Warning Stock Market is in Danger Zone

We use investment sentiment as a contrarian indicator of where the stock market is headed. This past week’s increased investor optimism means the stock market has become very risky. In fact, the Bulls/Bears poll of newsletter writers and editors entered the danger zone.

Bullish sentiment among these writers, who historically are wrong, moved up to 55.1%, from 53.8% a week ago, and 43.9% in late August. Bearish sentiment also was worrisome, moving down to 16.8%from 17.0% last week. The bull-bear spread (see chart) expanded to 38.3%, from 36.8% a week ago, well into the warning zone. Advisors in this poll projecting a correction continued down to 28.1%, from 29.2% last time. Correction readings below 30% are a concern. They indicate these editors are heavily invested.

Investor Sentiment Gauges Warning Stock Market is in Danger Zone
Investor Sentiment Gauges Warning Stock Market is in Danger Zone

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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