The stock market is like a crowded canoe. If enough people in the boat lean far enough over the same side, you’ll see a swift reaction.
That’s why sentiment surveys are so useful. If you can gauge exactly when opinions begin to shift toward extreme levels, you can plan to play the snapback move no one else saw coming…
There are a ton of sentiment gauges out there. But many of them — such as consumer confidence — are a more useful measure the economy, not the markets. So if you’re looking to find out how the market will probably react in the short-term, your best bet is to find out what newsletter writers are recommending.
This is not a sales pitch. You’ll see why in just a second…
Here’s a chart showing 10 years of newsletter sentiment compared to the S&P 500. Whenever the sentiment reading pops above 70%, the broad market has pulled back to some degree on a consistent basis. As of the most recent reading, bullish sentiment is topping post-financial crisis highs.
So unless newsletter writers have all bought new thinking caps, their bullish recommendations point to a correction in the near future. That’s right — it’s not a bad bet to go against newsletters when most of them are in agreement.
The folks at sentimenTrader have the stats:
“There have been a total of 9 weeks when the combined level neared 70% (a couple of them were clustered together). A month later, the S&P 500 showed a negative return every time, a median of -3.1%. Its maximum gain during the next month averaged only +0.1% (using weekly closes) while the maximum downside averaged -4.4%.”
As you can tell from the gauge, newsletter writers can be a fickle bunch (reserve your judgment — I might know one or two). The needle can swing between extremes a few times a year…
Even so, this is one gauge worth watching should the market continue to melt up. I’ll keep a close eye on any new developments in the coming weeks.
for The Daily Reckoning
Greg Guenthner, CMT, is the managing editor of The Rude Awakening. Greg is a member of the Market Technicians Association and holds the Chartered Market Technician designation.
"There has been an issue that has preoccupied my mind for a long time," writes Dr. Marc Faber. "In economics, it is generally accepted that if the quantity of money and credit is increased, prices will rise… However, since economics is so complex… I question whether the expansion of central banks' balance sheets and policies of zero interest rates could have a deflationary impact…" The good doctor wrestles with the question, in today's essay...
The Biotech iShares ETF is up 23% since the Oct. 15th bottom. No, that is not a typo. Biotechs have torched the S&P over the past two months--more than doubling the returns of the big index. And biotechs as a group are up more than 38% year-to-date. In fact, since we first highlighted the June comeback, the Biotech iShares have gone nowhere but up.
The oil market has been under siege for six months. From service providers to producers this downturn has been painful. Of course, we’ve known all along that oil prices were a little toppy over the summer. In fact, when asked just how low oil prices could go I usually answered with a simple “lower than you’d expect…”
Our forecast that Cuba would be open and integrated within 5-10 years is on track after yesterday's big announcement. Ahead of schedule, even. Click here to see how some investors have profited and what the island's likely future is...
The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential -- like parking lots -- have barely begun to change. Banker to the presidents Chris Mayer says you could triple your money in this new tech trend. Here's what you need to know.
It's a theme we've shared with you since April. And it's only gotten worse. The gaming industry has come under all sorts of pressure--a situation I first noticed in the charts. The powerful, multi-year uptrends started showing cracks. And it wasn't long before those cracks turned into gaping holes you could drive a friggin' truck through. That's where things stand today.