Email of the day (1)
"Sentiment Review - Request;
"Some sentiment indicators appear to be approaching bullish extremes and bearish commentary is thinning out to the point that it's hard to find even perma bears who think the market is not in a sweet spot at the moment! Bears seem to be resigned to accept temporary defeat for now, consoling themselves with lots of talk about kicking the can down the road. What's your take on the present sentiment position? ISE Sentiment Index article example - link… http://tradersnarrative.wordpress.com/
"Being invested in the sweet spot hypothesis, underweight and keen to increase positions, I'm leery, not least because I find it very hard to buy breakouts, or, when markets are making new highs. Preferring to buy the dips (due to previous miserable failures with breakouts that turned out to be top buying, short or medium term, it's a miserable practice I'm eager to exorcise), I failed to seize the opportunities presented in this latest consolidation and the question is this…can sentiment remain extreme for extended periods, like overbought conditions sometimes can?
"I've not been in the markets long enough to have witnessed such an occurrence and I cannot find any relevant data to review, so, if you can find the time for a sentiment review, it's sure to be of interest to others beside me.
"As we fast approach year's end, thank you for your undying dedication, your infectious enthusiasm and for taking the time and having the patience to translate and articulate the complex in plain English.
"Merry Christmas to you and yours, you appear to be living your dream, long may it be so."
David Fuller's view Thank you for
an interesting email and your personal good wishes which I return.
It is
true that sentiment indicators for stock markets are mostly overbought today,
so let us now view this in context.
Veteran
subscribers will recall the US
Advisory Sentiment Indicator from our colleagues at Investors Intelligence.
It has reached another one of its overbought readings, of which we have seen
at least 11 since 2003. Advisors are biased towards the upside side, so while
I wish to take note of overbought readings, I fine the extremes of pessimism
more convincing. I last commented on sentiment indicators in late August and
early September because they had all reached extremely bearish levels following
corrections from the April highs.
Therefore,
the current high reading is partially an unwinding of the extreme pessimism
which you may recall from a few months ago. Today's low level for the VIX
Index is another sign of optimism. More people are coming around to Fullermoney's
view that this is still a cyclical bull market but I would not describe today's
bullish sentiment as euphoric or extreme.
Fullermoney
also prefers to buy on dips, as subscribers know. Regarding breakouts, it depends
on the context. If a market has already risen a long way, buying on additional
upside breakouts is a speculative bet on continued momentum. However, buying
on breakouts from large base formations, or the first step above those bases,
makes sense to me as it often signals the early stages of a trend.
In answer
to your question, genuine extremes of sentiment - bullish or bearish - are seldom
extended beyond the short to medium term. The reason: an extreme in sentiment
is usually the consequence of a climactic move. In other words, it is the result
of a buying or selling climax which should be apparent from the price charts.
Market
sweet spots seldom last for more than a few months. Eoin and I have used the
term in the last few months but less so recently. Some of the previously leading
markets in Asia and South America have lost upside momentum, although they have
not broken downwards.
Fortunately,
the Wall Street leash effect, often a subject of concern, has been quite positive
recently. However QE will not continue indefinitely and interest rates are rising
in many countries. What I most fear, although it is an opportunity at the moment,
is a serious outbreak of commodity price
inflation. Arguably, this is already a concern for those who are paying
attention and it is only a question of degree and future shock for the unwary.