Yo-Yo Sentiment's Dance Continues: Expect More Volatility Ahead

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Unless there's a significant shift in the landscape, the current weakening market internals and the influx of unfavourable news will only momentarily nudge the markets downwards. However, after that, they will regroup and build momentum for the next upward phase. But why is this so?

The latest sentiment readings provide some insight. They've taken a surprising plunge, dropping 12 points from the previous reading to now stand at 40. Interestingly, the bullish sentiment has only once spiked to 56 and has not returned to that level since. As we've discussed earlier, for a market top to be established, this level would not only need to be revisited but also exceeded and then maintained for several weeks.

Technical analysis has confirmed that the markets are topping. However, more emphasis is placed on mass psychology, which has not validated this outlook. Under these conditions, the markets will likely witness increased levels of volatility. These volatile phases could span a few days or even extend to several weeks. In such a scenario, it wouldn't be surprising if the S&P 500 Index shed 350 to 500 points. Under these conditions, the larger the fall, the better the opportunity. This might seem paradoxical, but it's an intriguing facet of Mass Psychology.

Gradually, the savvy investors are diversifying their portfolios, with a significant portion being allocated to small-cap stocks. Consequently, we anticipate that the currently overlooked sectors will experience robust growth in the next upward trend. Meanwhile, many of today's top performers will likely release large amounts of steam.