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A Reason to be “Extra-Attentive” to Stock Market Sentiment Measures

Extreme sentiment is “not an automatic reason to be bearish the market. But …”

by Bob Stokes
Updated: June 30, 2020

Extreme investor sentiment, whether bullish or bearish, is often a sign that a financial market is on the cusp of a turn.

Here's the reason: When almost everyone is bullish (or bearish), there's almost no one left to push the market higher (or lower).

Having said that, an extreme market sentiment can become even more extreme before a trend change occurs. So, an investor should not rely solely on sentiment measures when making portfolio decisions.

In other words, sentiment measures should be put into context with technical indicators, the Elliott wave model and other factors which an Elliott wave expert may consider important.

Indeed, EWI's Chief Market Analyst recently discussed the elevated optimism since the March stock market lows and also noted an important caveat.

Here's a chart and commentary from our June 24 U.S. Short Term Update:

June24InvestorsIntelligence

This week's release of the Investors Intelligence Advisors' survey shows another measure where optimism is now higher than it was at the February 12-19 stock market peak in the blue-chip indexes. The percentage of bullish advisors is up to 57.3%, the highest total since January 21, as denoted by the red arrows on the chart. By the end of March, the Dow was 38% lower. Extreme sentiment can remain extreme, so it's not an automatic reason to be bearish the market. But the fact that advisor optimism is increasing while nearly every stock index is declining, save the NASDAQ, is a reason to be extra-attentive....

Yes, there are even more measures of extreme elevated sentiment that investors need to know about.

Plus, here are two recent headlines:

  • Wall Street rally wins more fans as economy hints at recovery (Reuters, June 17)
  • What's Next? Probing The Data For Clues As Market Sentiment Remains Bullish (Forbes, June 17)

Well, the stock market's Elliott wave pattern, plus the extreme bullish sentiment, provide a high-confidence answer to the question of "What's next?"

Indeed, EWI's analysts review more than 100 indicators to help subscribers stay ahead of key market turns.

Tap into our insights now, risk-free for 30 days.

Follow the link below to get started.

Why The Elliott Wave Theorist is “Habit-Forming”

If you’ve never read The Theorist, review the June publication (free for 30 days), and you’ll learn why long-time subscribers eagerly await each new issue.

You see, The Theorist is a one-of-a-kind monthly publication. It delivers financial market and social insights with an intellectual force and writing style that are unmatched.

Just read it for yourself, and further persuasion attempts will be unnecessary. You’ll see.

Now, as far as the June issue is concerned, get ready to get technical.

Learn about current chart formations, momentum indicators and insights into volume readings – all of which are of the first importance – now.

The Theorist is part of our flagship investor package, and you can follow the link below to get started with that zero-obligation trial.

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In mid-April, Currency Pro Service told subscribers to expect a rising trend in the Aussie/US dollar. We called for a powerful Elliott Wave pattern known as "a third-of-a-third wave" higher. Now see for yourself what followed.

EXCLUSIVE

See Just How "Historic" 2020 Has Been for U.S. Stocks

When you look at the DJIA's past 100 years, a clear Elliott wave pattern emerges. But in 2020, another technical price pattern has entered the picture. It's a rare pattern. In fact, it's so rare, it's only appeared once in the past 100 years. Watch our monthly Global Market Perspective contributor explain the implications.

EXCLUSIVE

NASDAQ vs. DJIA: Does the Recent Divergence Matter?

Since its March bottom below 7000, the NASDAQ has rallied over 4000 points to a new record high. The DJIA… not so much. It's not the first time we've seen a "languishing Dow and the ebullient NASDAQ." This excerpt from our new, August Elliott Wave Financial Forecast explains.