... <font color=maroon> Contrary Indicators and Investor Sentiment.. nice article just wrong timing (original article posted on October 11, 2000, reprinted here almost in its entirety, no editing whatsoever)
.......In other words, as an upside rally gets underway and investors pile in, their profits begin to pile up, and they become increasingly more excited and optimistic. So it's not surprising, in fact could be no other way, that by the time the rally reaches a top, investor enthusiasm and bullishness will also have reached an extreme, and they will find it hard to recognize that the inevitable turning point has been reached. In the other direction, when a correction gets underway, if it becomes serious, investors will become increasingly fearful and bearish as prices continue to fall. So by the time the correction ends, investor fear and bearishness will have reached an extreme, making it difficult to recognize the buying opportunity.
Investors are spurred on to those extremes by a similar reaction in the media. When rallies are underway, the media becomes increasingly excited and bullish, with the result that near rally or market tops, nary a discouraging or cautionary word is heard. Each day brings reports dominated by stocks that are making new highs, and interviews with the most bullish of money managers and Wall Street spokesmen. At the opposite extreme, by the time a correction has run its course, the media has become extremely negative. Its reports and commentaries are dominated by news of the stocks that have collapsed or are making new lows, and its choice of interviewees are dominated by those with bearish forecasts.
You need only think back to this past spring. Investor euphoria and bullish sentiment for the Nasdaq as it soared past 5,000 became extremely high with investors and the media. Buying on 50% margin reached a record high, etc. When our technical indicators gave a sell signal on the Nasdaq and we recommended selling it short with a downside target of 3500, we received the most mail ever, including from those in the media, indicating that we were going to be wrong this time, because can't we see how powerful the uptrend is. Then, during the recent August rally attempt, investor bullish sentiment again reached high levels (and margin buying returned to record levels). There was again great reluctance to believe the sell signal on our technical indicators and our recommendation to sell the Nasdaq short again, or that we could be right in predicting a resumption of the downside for the entire market. Because the rally had made investors optimistic again.
But that bullish sentiment has now taken a nose-dive after the subsequent September/October correction, and is beginning to approach levels usually present at important correction lows. For instance, the American Association of Individual Investors reported last week that its latest member poll shows only 41.9% are now bullish (expecting a rising market), down from the 62.5% that were bullish in their September 6 poll, after the August rally. The percentage bearish (expecting a market decline) has increased sharply from 8.3% at the August rally peak, to 25.8% now that we've had the significant drop of the Sept/Oct correction. We'll be interested in seeing the numbers at the end of this week, given the further market plunge.
The CBOE Put/Call Ratio has risen to 0.82 as the usually wrong options players are now betting heavily that a market correction lies ahead, just the opposite of their outlook at the August rally peak.
So, we are watching the investor sentiment readings very closely along with our technical indicators, as both seem to be setting up for the significant low and buying opportunity in the October/November time-frame that we've been forecasting since last March.
<Editor's comment So everything sounds very interesting and no doubt we can all learn something from investor sentiment especially the lack of desire to sell when things are at the top and everyone on CNBC and analysts are upping price targets and everyone is blowing the horn of plenty. Okay but what about the second part of this article. All sounds good about predicting a market low.. But this commentator which shall remain nameless... called a market bottom for October and November (The article was posted on October 11, 2000).. so with all the dance steps learned and relearned he/she still didn't get the dance right. What this simply means is that everything we read, we take with a grain of salt. Add it to your memory banks, thing about it but plough on according to the actual trends and not 'chart patterns'... calling for contrary indicators when it just wasn't the right time.
So even as this analyst was telling up about indices setting up in oversold territory for such a potential buy signal and buying opportunity, he was not only premature by 6 weeks but fell smack into the eye of the storm, right in into the earnings shortfalls pre-announcement season.
Perhaps we can reapply some of his thoughts now at least for the SHORT TERM... as we might have a short term rally, but for the long term, I would not trust any prognostications. If indeed NDX rallies for 3,500 and higher, there will be too many savvy sellers that will take profits before the inevitable sell off>
There is still the S&P 500 to contend with and it closed on Friday 1341.8 but if it hits 1332.0, it will be a double bottom point & figure sell signal. On the other hand the S&P might take out resistance 1359.5.. Here we are 6 weeks later, and still oversold in the indices... but the downtrend is sharper still. |
