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Stock Market Sentiment Indicators Continue to Advise Caution

We use Investor sentiment as contrarian indicators of market direction. While short-term indicators are no longer oversold, suggesting the possibility of short-term bounces, the real story remains with the intermediate-term indicators. They suggest stock market investors should remain cautious, with no stock market bottom in sight, particularly in this period of high volatility and global economic and political uncertainty. We should also note that another bad sign for the stock market is that the weekly trading breadth remains very negative and new stock lows outnumbered new highs for the second week.

As for intermediate investor sentiment, The Investors Intelligence Bulls/Bears poll of stock market newsletter writers’ spread between bullish and bearish sentiment barely changed to +31.2 from +31.4% 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 remained heavily in the minority,  barely moving to 33.0% from 32.4%.

Stock Market Sentiment Indicators Continue to Advise Caution
Stock Market Sentiment Indicators Continue to 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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