Friday Market Sentiment
Disclaimer: All charts and comments are intended for education and discussion purposes only. No investment recommendations are being offered. Please do your own research and take responsibility for all investment decisions that you make. Questions and comments related to this post are encouraged. | MON - Sector Strength | TUE - Interest Rates | WED - Market Breadth | THU - Commodities & Currencies | FRI - Market Sentiment | SAT - Bullish Percents | About | contact: HeadlineCharts@gmail.com |
This weekend I'll take a look at how bad the damage was to the market as a result of yesterday's broad based sell off.
Below is a look at investor sentiment shown in a diagram of four investor surveys. The individuals and bloggers remain quite cautious towards the market despite the huge gains of a very powerful bull market run that began late last summer. Their lack of bullishness has been, and continues to be, very favorable for stocks from a contrarian sentiment view point. The newsletter survey is more important than the others because they have a greater need to be right about the market in order to keep their subscribers. So they really can't afford to be on the wrong side of the market trend. They are currently getting close to an overbought bullish extreme reflecting the need to be in sync with a very strong stock market. This level of bullishness is hard to assess because it is still just shy of the bullish extreme, so it is probably neutral towards equities when viewed as a contrarian sentiment indicator.
The survey information above can be obtained for free via the following sites. Investor's Intelligence is from Market Harmonics,. Individual Investors is from aaii.com, Market Vane is from Investment Tools and Birinyi Bloggers is from Ticker Sense.
Regarding Market Vane, this is a survey of futures commodity advisors and is used by futures traders. The publisher states that it is best 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. For additional information about market sentiment, I recommend a blog by Brent Leonard.
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.
Keep in mind, sentiment analysis is not a science and only provides very general information. Sentiment is not a signal to take action, but provides background about the current state of the markets. For instance, there have been many occasions when bullishness reached high levels well before the market started to weaken.
The chart below shows a different view of the II newsletter writer's survey. By including the writers that have a bearish stance towards the market as a ratio of bulls vs. bears, it indicates that the sentiment of writers is generally at levels that should start to work against stocks.
I like to check in with the VIX at least once a week, and right now it is working against equities. Generally, if the market is trending higher then the VIX should be gradually trending lower. Right now the VIX is moving higher, which is the wrong direction. This is clearly a negative divergence. John Murphy and Marty Chenard have expressed similar concerns. For additional analysis, check out VIX and More.
