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Investor Sentiment Rising Optimism Raising Red Flags

Investor Sentiment Rising Optimism Raising Red Flags. We use investor sentiment as contrarian indicators because the average investor usually is wrong about the stock market’s direction. So it is worrisome that Investor optimism was up again this past week. Apparently naïve investors continue to be lured into complacency by record and near-record highs of the major indexes, ignoring, or ignorant, of  the underlying market weakness exemplified by the fact that more stocks on the Nasdaq and NYSE once again went down than up.

So despite the markets’ underlying structural difficulties,  the Investor Intelligence survey of  market newsletter advisors shows bullish optimism increasing to 58.1% from 57.2%. This is the fourth week above 55%, signaling the  need for defensive measures including tight stops and selling some shares with large gains.  The latest reading exceeds the mid-July peak of 58% before the markets sold off to their August lows. Bearish sentiment was again very low, at 17,1%. For the seventh week the bull-bear spread expanded, ending at +41.0%, from +40.1% a week ago (see chart). This is the second bull-bear spread above 40%. It nearly equals the reading in mid-July before the August selloff. It is another clear call for defensive measures.

Investor Sentiment Rising Optimism Raising Red Flags
Investor Sentiment Rising Optimism Raising Red Flags

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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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