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Investor Sentiment is Extremely Fearful, Indicating Stock Market is Oversold: But  Be Careful!

Investor Sentiment is Extremely Fearful, Indicating Stock Market is Oversold: But  Be Careful!  We use investor sentiment as contrarian indicators of where the stock market is headed because investors historically are wrong.  The recent huge market drops have driven investor sentiment to levels of extreme fear, indicating the stock market has become oversold.  That spells buying opportunities based on the historically accurate sentiment indicators we follow.  However, we also caution our readers to be very careful. That’s because the great amount of economic and political uncertainty out there could trigger further market drops following upward moves that could drive the market to overbought levels and sentiment from fear to greed.

Investor Sentiment is Extremely Fearful, Indicating Stock Market is Oversold: But  Be Careful!
Investor Sentiment is Extremely Fearful, Indicating Stock Market is Oversold: But  Be Careful!

For instance, the investor CNN Fear/Greed short-term stock market indicator at a level of 3 is showing extreme fear in contrast to greed a month ago well before the big market drop (see chart above). Meanwhile, SentimenTrader’s Smart/Money Dumb Money Confidence Spread is showing growing optimism among smart investors while fear pervades the so-called dumb investors (see chart below).

Investor Sentiment is Extremely Fearful, Indicating Stock Market is Oversold: But  Be Careful!
Investor Sentiment is Extremely Fearful, Indicating Stock Market is Oversold: But  Be Careful!

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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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