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 |
The newsletter writers, individual investors and bloggers are in the neutral range which is generally a level that is favorable to the stock market.
The newsletter writers were extremely bullish early in the year and that was a major warning that the market had become extended. I am most familiar with the newsletter survey which generally peaks and then moves lower prior to a peak in the market, and that is what appears to be happening with this cycle. So at the current level it is short-term supportive of the market, but because it has already peaked for this cycle, it is also a caution signal about the market.
The second chart is taken from a blog site named Market Harmonics that I reached via the blog site The Sentimentals. This chart illustrates the highs and lows of the newsletter survey and how it peaks prior to the market peak. Because the survey peaks can be so early, it shows that this type of sentiment survey is to be used to understand the background that the market is operating in, but not as an indication that the trend of the market itself has changed.
Regarding Market Vane, this is a survey of futures commodity advisors and is used by futures traders. It has registered in the bullish extreme for a number of months now. I had been using it with the same contrarian viewpoint that the others are used regarding the intermediate cycle. That is, if the bullishness is too extreme, then it indicates a potential top approaching in the market but not an immediate indication of a change in trend. However, the publisher states that it is better used as an indication of the current short-term trend, with the idea that investments in futures should be in line with the trend. So this survey has to be viewed separately from the others. I will let readers make up their own minds on this survery.
For additional information and more thorough analysis about market sentiment, I recommend blogs by ZenTrader and Brent Leonard.
It is a good idea to check in with the VIX at least once a week to get a feel for where it stands in relation to the stock market. I'm not an expert on the VIX, but my view is that it needs to be generally moving lower as the market moves higher in order to confirm the market. But if it moves too low it indicates a trend towards complacency which is ultimately bearish for the market. On the other hand, small spikes higher in the VIX can be short-term buying opportunities in an uptrend, but that is until the VIX moves above recent retested upper levels which may indicate a correction is unfolding. So the current level and trend of the VIX looks about right to me in order to say that it is acting favorably in relation to the stock market. For a much more expert and thorough analysis, check out a really interesting blog site that has terrific discussion of the VIX and related topics called VIX and More.
The 60-day moving average of put/calls seems to be following a pattern similar to the one shown in the prior market peaks. The index has reached a low shown by the lower trend line, and has started to curl higher in advance of a peak in the market. This appears to be another general warning signal about the intermediate cycle and that it may be nearing a top. It is a bit confusing however that the level of short interest, shown in the next chart, is at extreme high which is bullish for the market, while this put/call ratio is at a low level. I will let the readers decide for themselves
The most recent figures on short interest are as January 19, 2007.
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.
