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U.S. Stocks: What Market Sentiment Indicators are Telling You

Indicators point to the late stages of a rally

by Alexandra Lienhard
Updated: August 17, 2017

In this new interview with Robert Kelley, the editor of our U.S. Stocks Intraday Pro Service, he explains why bullish sentiment indicators aren't necessarily bullish for the market. Watch this new interview to learn what he expects next for U.S. stocks.


Alexandra Lienhard: Today on ElliottWaveTV, I'm talking with Robert Kelley, the editor of Elliott Wave International's U.S. Stocks Intraday Pro Service. Hi, Robert. It's good to see you.

Robert Kelley: Hi, Alex. Good to talk to you again.

AL: And now, the last time we spoke, we talked about divergences between a lot of the indexes that you track. Now, are you still seeing sharp differences in the wave patterns that these markets are tracing out? And if so, what does that imply?

RK: Well, there are a few differences. I mean, we saw new highs about a week ago in the Dow and the S&P while the NASDAQ failed to make a slight new high. And that was a good indicator that we were likely to see a decline, which we have. On a very short-term basis, though, we saw a new low in the Dow on Friday unconfirmed by the S&P and NASDAQ. So short term, it is a case for a little bit more of a rally here. But bigger picture, yeah, the Dow strength recently has gone largely unconfirmed, at least percentage-wise, by the rest of the market. And that's kind of a late stage of a rally type of signature.

AL: Now, market sentiment indicators, which is measures of optimism and pessimism amongst investors and traders, is also something that you monitor closely. What are those telling you these days? Still seeing extremes there?

RK: We saw some bullish extremes back earlier in the year. And recently, the indicators have worked off those extremes and returned to more neutral territory. The Daily Sentiment Index on the S&P got down to 52, I think, Friday. But the CNN Fear & Greed Index, which is something that's a little more changeable and is updated throughout the day, hit 28 on Friday, which is the lowest level since April 18. So that's a little bit of a bearish extreme on the Fear and Greed Index, which is suggesting to me that there may be a bit more of a rally here to come before a larger correction sets in.

AL: Now, Robert, when some investors hear you say that sentiment is bullish, they may actually interpret that as a bullish sign for the market. Can you explain how, in your experience, it's actually the opposite?

RK: Yeah, sure. For example, in the Daily Sum Index, if there's 80% bullish, what that means is that 80% of the people surveyed are bullish, which basically means they're already positioned long in the market. And so we look for extremes to see when the vast majority of traders are long. There's few people left to come in and be a buyer to push the market higher. So we look for those extremes -- high numbers on the upside. And the opposite is true in a declining market. If everyone's pessimistic, it means they've already sold their positions and there's very few sellers who are able to come in and keep the downtrend going. So basically, just look for these extremes. And of course, you have to use it in conjunction with the wave count primarily. And of course, we'll look at some indicators, moving averages, that sort of thing to help us smooth out some of the sentiment numbers.

AL: Now, last question for you. You recently alerted subscribers to an opportunity in Facebook. So can you tell me a little bit about that and how you spotted that opportunity?

RK: Yeah, back on July 6, I noted that Facebook was holding up a lot better than the NASDAQ 100 Index, which, of course, it's a big member of that index, and that it was completing a corrective pullback, it looked like. So just below the 150 area, I posted an update showing a wave count that called for a third wave up and a larger fifth wave that should go to new highs. And since then, it's rallied over 170. And I still think it's got a chance for one more push higher before it tops out. But that was a really clear wave count. And when you see a divergence and you see it outperforming the NASDAQ overall, like it was, that's a good sign that this stock is relatively strong. And when the wave count was really clear, as it was, it really offers a good opportunity.

AL: Sounds like a great example of the wave principle in action. Thanks for talking today, Robert.

RK: Thank you. Thank you, Alex. Talk to you soon.

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