Stock Market Sentiment Indicators Advise Caution
We use Investor sentiment as contrarian indicators of market direction. It comes as no surprise that the CNN short-term Fear/Greed Index (see chart) registered extreme during this week’s market turmoil. That. from a contrarian point of view, indicates there’s a possibility of some short-term market bounces. However, intermediate-term gauges are telling investors to remain cautious. There’s certainly no indication that a bottom has been reached despite the big drops.
The Investors Intelligence Bulls/Bears poll of stock market newsletter writers’ spread between bullish and bearish sentiment expanded very modestly to +31.4% from +30.2% last time (see chart). A spread above 40% calls for increased defensive measures by investors. However, a spread over 30% still means investors should be defensive. Another contrarian warning sign for investors from this poll is that the group of advisors projecting a correction contracted to 32.4% from 34% the previous week.