Wednesday Market Sentiment
All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. Comments below related to this post are encouraged. | MON - Sector Strength | TUE - Interest Rates | WED - Market Sentiment | THU - Commodities & Currencies | FRI - Market Breadth | SAT - Bullish Percents | About |
Sentiment in the better known surveys has shifted strongly in favor of bullish sentiment, and as a contrary indicator, sentiment is now working against equity prices.
The surveys show that since the lows in mid-June, advisors and investors have become more and more bullish along with the rising stock market. Last week it appeared that bullish sentiment had peaked, at least temporarily, and bullish sentiment had started to decline as the market reached overbought levels. Now it appears the surveys show another strong shift towards bullishness which is not good for the equity markets.
The better known surveys, II, AAII and MV, clearly reflect a strong market that has rallied for over 6 months and is now at a level of high-risk for a correction. These polls consistently reach their bullish extremes near the peak of an intermediate cycle.
The Birinyi blogger poll is still at a very low level of bulls and indicates a segment of investors with a consistently high degree of skepticism about this market. However, this group of investors has been on the wrong side of the market for months so it is hard to read into the poll results.
Sentiment analysis is an important component when following the markets, and is considered a “contrary” indicator. Contrary because if too many people are bearish then there aren't enough sellers left, the balance tips to buyers, and the market starts to advance. If too many people are bullish, most funds are already invested, the balance tips to sellers and the market weakens. One way to determine if investors are bearish or bullish is by taking surveys and tracking at what levels these polls indicate investors are at the extremes of bearish or bullish sentiment.
The figure above shows four polls and their current sentiment levels. Keep in mind, sentiment analysis is not a science and only provides very general information. Sentiment is not a signal to take action, but is a warning about the current state of the markets. There have been many occasions when bullishness reached high levels well before the market started to weaken.
