Greg Guenthner

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…

Stock and Nasdaq Newsletter Sentiment vs. S&P 500

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.

Best,

Greg Guenthner
for The Daily Reckoning

Greg Guenthner

Greg Guenthner, CMT, is the editor of the Daily Reckoning’s Rude Awakening. Greg is a member of the Market Technicians Association and holds the Chartered Market Technician designation.

Recent Articles

5 Min. Forecast
How to Profit On the Back of an “Activist Investor”

Dave Gonigam

Since the invention of the "shareholder rights plan" (i.e. the "poison pill"), most companies are relatively immune to hostile takeovers. But according to Dave Gonigam that could all change thanks to one activist investor. And if you're savvy enough, you may just be able to follow his lead for big gains. Read on...


Extra!
Why Americans Shouldn’t Worry About Income Inequality

Jim Mosquera

As the markets have continued to rally over the last several years, more and more people have touted the problem of "income inequality" in the US. But as Jim Mosquera explains, this perceived problem will likely sort itself out with the arrival of one specific market event. Read on...


One ETF to Play Asymmetric Warfare

Addison Wiggin

Almost one year ago, substation telephone cables were maliciously cut in San Jose, CA. In 20 minutes, 17 transformers were knocked out. A year on, similar threats have cropped up. Today, Addison Wiggin explains why these threats are so serious for the safety of the global economy... and shows you one way to play it...


What Small-Caps are Saying About the Current “Bubble”

Greg Guenthner

The big problem with declaring bubbles is that it really does you no good. Unless you're attempting to measure and time market moves, you're also blowing hot air. But if you keep watch for negative divergences, you have a much better shot at figuring out big market moves than the latest bubble-busters. Greg Guenthner explains...


A Simple Strategy for Investing in the US Energy Boom

Byron King

Too often investments are made in a vacuum. But as Byron King demonstrates, the global economic crash... easy money... and technological advancements are all interdependent. In particular, that connection has changed the investment calculus in the resource market. Read on to learn how...


How Gold Will Respond to Declining Discovery

Henry Bonner

Oil isn't the only resource to experience "peaks." Due to a major contraction in gold exploration over the past few years, the mining sector is no longer mining gold at its replacement rate. In other words, the amount of gold above ground is running out. And according to Henry Bonner, it will get worse before it gets better...