For the fourth week in a row, equity market investor sentiment remains neutral. Six week's ago it was extremely optimistic and just like that with everyone all in, the market struggles. For sure, the indicators are unwinding, as we head from extremely bullish sentiment to extremely bearish sentiment. That means we have gone from a "sell" signal and are heading through neutral to a "buy" signal. The best way to get to a "buy" signal is to have lower prices. The best market bottoms occur when investors are bearish towards the markets. We are not at that point. A bottom at this juncture would be consistent with a market that will remain range bound, which means you will need to be a trader as opposed to an investor. The way to make money in such markets is to buy the dips and sell the rips.
See the Equity Market Investor Sentimeter below, which is our most comprehensive sentiment indicator. This indicator is constructed from 10 different data series including opinion data (i.e., how do you feel about the market?) as well as money flow data (i.e., where is the money going?). This is the current state of equity market investor sentiment.
Over the past year, sell offs have been met with Federal Reserve intervention -- namely QE3 and QE4. These interventions short circuited the sell offs. I believe this is not healthy bull market action, and at some point, these distortions will be corrected. At this point, it is difficult to know if the Fed has something else in its bag of tricks and what will it take to use it, but rest assured they will do whatever they can to prop up the markets. (See our Video of the Week). Investors continue to put a great deal of credence into the notion that the Federal Reserve has backstopped the market. Six week's ago we had parabolic readings in the indicators and this would suggest that this belief is strong. But the markets had something else in mind as though readings marked the near term highs. A neutral reading in the indicator implies that there is little predictive edge to the market action.
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