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How Investor Psychology Has Reached a Critical Juncture

"Measures of complacency … are right back to where they were on … the day of the Dow's peak."

by Bob Stokes
Updated: June 07, 2018

Elliott Wave International analysts have learned throughout their decades of market observation that when investors turn complacent, a jarring volatility often follows.

For example, the September 2007 Elliott Wave Theorist said:

The market is certainly poised for a panic. Confidence has held sway for 2½ decades, during which time investors have become utterly unconcerned with risk. They hold a number of misconceptions that foster such complacency.

Just weeks after that commentary published, the DJIA topped and then fell 54%.

Fast forward to January 5, 2018. Complacency was once again widespread among investors, from hedge fund managers and financial advisors to Mom-and-Pop market participants. The Elliott Wave Financial Forecast said this:

According to the latest American Association of Individual Investors poll... there are currently 3.8 bulls for every bear, the highest ratio in seven years. History shows that this normally cautious group generally only capitulates to a bull market trend in its late stages.

As I'm sure you know, the DJIA topped later in January, and that was followed by some wild days of market volatility.

Now, here we are in June 2018, with a critical update on investor psychology.

Here's a chart and commentary from our June 6 U.S. Short Term Update:


Measures of complacency toward the prospects of a decline are right back to where they were on January 26, the day of the Dow's peak. The chart shows the DJIA and the CBOE Volatility Index (VIX), which today closed at 11.65, the lowest level since the day of the January top (11.08). Traders are as complacent as they were in late-January, but prices are at a lower high...

Just look at these June 6 CNBC headlines:

  • Wall Street's biggest bull sees the S&P 500 at records by year's end
  • This 18-year-old launched a hedge fund from his bedroom in suburban New Jersey
  • Investors see tech stocks as defensive now

All these are indications of an epic complacency.

Investor psychology is clear: It's vital that you stay up-to-the-minute on the DJIA's price pattern, which has reached a pivotal juncture.

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