For the past 2-3 years, a similar pattern has repeated itself in the financial markets. The major indexes start to break down towards their 50-day moving averages, the overall market starts to weaken (usually sparked by a geopolitical event), and then sentiment turns EXTREMELY BEARISH in a short period of time. It happened again over the past 2 weeks. Here are 3 examples:
1) The CNN Fear/Greed Index (measured from 0-100) moved from 95 to 5 in just two weeks! It closed at 12 this week. This shows an extreme shift towards fear in the market.
2) The CBOE Equity Only Put-to-Call Ratio spiked over 1.0 on Friday 8/1/14. It rarely shows a reading this high, and when it does, the averages are usually down about -1.75% for the day. On Friday 8/1, the market was only down -0.29%. In other words, there was a high level of fear when the overall markets were not down much.
3) The NAAIM survey of active investment managers dropped from over 80 to 50, its lowest reading since October 2013. This survey tends to be a great contrarian indicator and usually correlates with near-term market lows.
There are many reasons why sentiment gets so negative so quickly. Some include: People are watching the market too closely, we’ve gone too long without a 10% correction, many got burned in 2008 and don’t want it to happen again, people don’t trust the market, the second the Fed unwinds their bond buying program we’re doomed. Whatever the reason, it seems as if so many people have one foot out the door ready to get out of this market. In my opinion, this nervous psychology is helping to keep a decent bid underneath the market’s surface. I can’t tell you how to use this sentiment data because I don’t know your timeframe, but it’s worth paying attention to because the market tends to fool the majority.
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