Guest Post by Elliott Wave International
Here’s one good reason why: a historic market sentiment extreme
The DJIA, S&P and NASDAQ are struggling to bounce. Yet the bullish convictions remain high. Says a February 5 Investor’s Business Daily headline:
“Why Mutual Fund Investors Need Not Panic After January Sell-Off”
The VIX signaled that market participants were way too complacent about the bull market well ahead of the correction. This made sense because the complacency reading came hand in hand with ‘dumb money’ sentiment way over bullish.
VIX & SPX daily, from NFTRH 264
In this case the signal took patience that I for one did not have. If one had just noted the hysterical highs in bullish sentiment and the flat lined VIX at support, one might have simply bought call options on the VIX and paid no attention to them until they paid off. That is what one might have done, but psychology is such a prominent aspect of the markets for we humans. It is harder to do than it sounds.
Dumb money looking pretty smart, eh? Market sentiment is not really a finely tuned timing tool, but the above is representative of a condition that will be in place at the next minor and/or major market top.
With the exception of the Gold Bugs and to a lesser degree, the biotechs, the stock market is over bullish. It is debatable as to whether the recent semi-extreme readings were bull killers (I am sticking with an eventual cyclical top out in early to mid 2014). But it does appear (especially when factoring in things like the lack of leadership in the BKX-SPX ratio and the S&P 500 at a daily RSI topping point for example) that the market is ripe for a continued short term decline here. Adding to the case (graphics courtesy of the highly recommended Sentimentrader.com)…
Another thing that NFTRH 260′s 24 pages did not allow time for was a sentiment update, so here are some thoughts now with a graphic courtesy of Sentimentrader.com.
Unfortunately we are flying blind with respect to CoT data because the CFTC is shuttered up with the government shutdown. But here are the updates in other areas.
The mainstream media headline is VIX ‘Fear Gauge’ Jumps and bears are probably smelling a rat as the Debt Ceiling / Government shutdown drama drags on. This is the setup that preceded the bullish Fiscal Cliff and what seems like a hundred other government related dramas over the last year. We’ll see.
The public does not like gold or Uncle Buck right now. Something to think about. Another thing to think about is not being a ‘death of the dollar’ hyperinflationist when cheering gold because that is a sales pitch. Gold and the US dollar are promoted as hard core adversaries; but why? If a liquidity problem crops up they will both probably benefit. Graphics courtesy of Sentimentrader.com…