Sour Sentiment Spells Stock Market Disaster
Tuesday, August 26, 2008 | Chris RoweRating:
Boy oh boy, am I in the minority or what?!And I feel ever so comfortable here. This is my happy place. When you feel the same way about the market as everybody else around you, then something's wrong. And right now, the bearish camp is mob deep, holding hands and singing Kum-baya.
There are two main sentiment indicators that I like to watch. One is the Investors Intelligence Advisors' Sentiment indicator, and the other is the well known CBOE volatility index (aka "the VIX".)
Sentiment indicators are contrary indicators -- if too many investors are bullish, it's a bearish indication and vice versa.
What's strange is the Advisors' Sentiment Indicator is showing extreme bearishness, which means we are likely close to an intermediate bottom. On the other hand, the VIX is showing a complacent market. I don't have an analysis for you today. I'm just confused about it. Typically both indicators are spot-on. Anyone who has studied my Internal Strength System has studied both indicators and knows that 9 out of 10 times, the buy signals (and in the case of Advisors' Sentiment, sell signals) are right on time.
So what's up with the discrepancy?
Well, let's first speculate on the discrepancy and then talk about what's happening. First, let's consider what each indicator is.
The Advisors' Sentiment Indicator is the result of a poll taken from over 200 newsletter writers asking whether they are bullish, bearish, or in between somehow. So when asked if they are bullish or bearish, you get an answer.
The VIX reflects the price of certain options on the S&P 500. If these options become more pricey, it's an indication that investors are willing to pay more for them, which happens when investors become nervous or fearful. Hence the index's nickname "The Fear Gauge".
So what can we speculate is causing the discrepancy here?
Could it be that while investor newsletter writers are secretly complacent or even bullish, they are saying the opposite?
I mean, the VIX is an indicator that moves because money is moving from one place to another. In other words, the VIX moves because people are putting their money where their mouth is. Does the Advisors' Sentiment survey show excessive bearishness (a bullish sign) because most newsletter writers are afraid they will seem foolish for saying they think the market moves up from here (for now)?
This is possible of course, but pure speculation. Although sometimes when everyone is saying the same thing, it can be very difficult to say the opposite.
I can tell you one thing, from the perspective of a person who writes to over 150,000 readers, I can understand how it might be difficult to tell the entire world that you think we see (and are seeing) an intermediate advance in this market. I mean, people think I'm crazy. And that fact alone should probably be charted because it's a highly accurate indicator. When everyone thinks Chris Rowe is crazy is when Chris Rowe typically makes the most money (along with members of The Trend Rider). We can call it the Chris Rowe B.S. indicator (where "B.S.", of course, stands for Bullish). ~ Oh boy, I can see the comments on that one now. Bring it on!
When certain things that I watch closely in the stock market occur at the same time, I would have to estimate that at least 9 - 9.5 out of 10 times, I'm dead right about the market's move. If you read last week's article titled "'Wall of Worry' Opens Door to Profits," you know what I think about this market.
Okay, Freddie Mac and Fannie Mae are getting slapped silly. Lehman Brothers is in play again. (What else is new?). Maybe the new home sales report and consumer confidence will knock the market down again by the time this article is published. And yes, the breadth of the market was extremely bearish yesterday. But that's just one day. You probably heard the financial media feeding off of your fear, reinforcing the bearish sentiment after the market closed. But hopefully they mentioned that yesterday was the lightest volume of the year. That means instead of the market being pushed down by sellers, it was down merely due to lack of buying.
Yesterday's breadth was negative. But read last week's article because while all of this bearish news has hit the tape over the last month, the trend is that more and more stocks are breaking resistance levels which is a very bullish sign.
This may not reflect on the financial news networks. It certainly doesn't reflect in the Dow 30. But it's happening. And when that happens while the Advisors' Sentiment Indicator gives the buy signal that it's giving, the market tends to rip higher for weeks to months.
We shall see. If anyone has any insight as to why the VIX is so complacent while the I.I. reading shows bearishness at historically record levels, please let me know by leaving comments below.
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“Profit from the Trend”
Chris Rowe
Chief Investment Officer
The Trend Rider
