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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.

Stock Market Sentiment Indicators Advise Caution
Stock Market Sentiment Indicators Advise Caution

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.

Stock Market Sentiment Indicators Advise Caution
Stock Market Sentiment Indicators Advise Caution

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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