Stock Market bottom: The Role of Sentiment

impact of investor sentiment on stock market

February 24, 2023

Article overview

In this market analysis, a stock market bottom is a crucial factor in determining the future trend of the market. It is suggested that a long-term stock market bottom will not be in place until one of the three sentiment measures experiences a sharp move and the market reaches the hysteria zone. Despite a robust market rally, the failure of bullish sentiment to meet its historical average is surprising, leading to two plausible explanations. One explanation is that investors remain shell-shocked and fearful, indicating a possible stock market bottom. The other explanation is that traders are awaiting better prices, but the issue is that the prices they were expecting have already been reached. The article also discusses the possibility of achieving FOAB or MOAB, depending on the fulfilment of certain criteria. Overall, understanding the stock market bottom is critical for making an informed investment decision.

anxiety index and sentiment chart

It takes a significant shift in one of three sentiment measures to propel the gauge into the hysteria zone, such as a sharp drop in bullish readings to the 10-12 range or a surge in neutral readings to 55. This observation was made in the latest market update issued on January 30th, 2023. Without such a shift, it is improbable that a long-term stock market bottom will be established.

Despite a strong market rally since October 2022, it is rather surprising that bullish sentiment has not yet reached its historical average, remaining below 39 persistently. One would have expected it to at least be in the 45 range by now. Two possible explanations come to mind. Firstly, the crowd may be shell-shocked and may stay in this zone for years, as suggested by subscriber data indicating fear and worry levels comparable to those seen in October 2008.

Sentiment and Stock Market Bottoms: Anxiety as a Signal

As past experiences suggest, high anxiety levels are usually associated with a stock market bottom. As a matter of fact, the fear and uncertainty levels among subscribers are now almost on par with those readings of October 2008. What happened next, you might ask? There was one final downward spike, and then the markets bottomed out, but investors remained shell-shocked for almost ten years.

Should the fear level among T.I. subscribers reach an all-time high, it will be added to the criteria for FOAB (Father of All Buys). Additionally, we have three more conditions to fulfil, and if these are met, we will achieve the highly elusive FOAB. In such a scenario, almost everyone at T.I. would invest everything we have and more (via leverage) into the Market. However, we strongly advise against using leverage/margin unless you are willing and able to take on additional risk. Two criteria are dangerously close to being met; should they indeed materialize, it will trigger a MOAB (Mother of All Buys) by default.

The second possible explanation for the failure of bullish sentiment to reach its historical average is that traders are waiting for better prices. The problem is that the prices they were hoping for have already been reached. If the Market pulls back again, it remains uncertain whether traders will jump in or continue to wait, assuming that even better prices will follow.


References

Here are some articles that discuss sentiment measures and their impact on the stock market:

“Investor Sentiment and the Stock Market” by Malcolm Baker and Jeffrey Wurgler, Journal of Economic Perspectives, 2006: https://www.jstor.org/stable/30033742

Surviving and Maybe Thriving as a Contrarian
https://www.psychologytoday.com/ca/blog/how-do-life/202008/surviving-and-maybe-thriving-contrarian

How to Exploit Luck to Gain a Competitive Advantag
https://www.psychologytoday.com/ca/blog/decisions-defined/201812/how-to-exploit-luck-to-gain-a-competitive-advantage


Other Articles of Interest

Lagging Economic Indicator

Lagging Economic Indicator

The Flaws of the Baltic Dry Index as a Leading Economic Indicator March 26, 2023 The Baltic Dry Index (BDI) ...
Read More
Semiconductor Outlook: Trends & Future Expectations

Semiconductor Outlook: Trends & Future Expectations

Semiconductor Outlook: A Promising Investment Opportunity for Long-Term Investors Mar 21 2023 Looking towards the future of the tech industry, ...
Read More
The Pitfalls of Group Think Psychology in Investing

The Pitfalls of Group Think Psychology in Investing

Group Think Psychology: Avoid the Lemmings March 16, 2023 In the world of investing, understanding the power of mass psychology ...
Read More
Fed Chair Jerome Powell

Fed Chair Jerome Powell: The Jackass

Unmasking the Idiotic Moves of Fed Chair Jerome Powell March 12, 2023 Jerome Powell, the Chairman of the Federal Reserve, ...
Read More
Amd Stock Forecast

AMD Stock Forecast: How MACDs & RSI Signal a Bottom

MACDs and RSI: The Basics: Feb 25, 2023 When analysing stock market bottoms, MACD and RSI indicators are two popular ...
Read More
impact of investor sentiment on stock market

Stock Market bottom: The Role of Sentiment

February 24, 2023 Article overview In this market analysis, a stock market bottom is a crucial factor in determining the ...
Read More
Technological progress

Technological Progress

Exploring the Myriad Ways Technological Progress Has Flourished in Recent Decades Feb 20, 2023 One might contend that progress is ...
Read More
Depths of the Unconscious Mind

Exploring the Depths of the Unconscious Mind

Overview of the Unconscious Mind Feb 20, 2023 Research supports the idea that our unconscious mind plays a significant role ...
Read More
Conquering the Stock Market Cycle of Manipulation with Mass Psychology

The Cycle of Manipulation in Investments

The Game of Deception: Navigating the Cycle of Manipulation in Investments Feb 18, 2023 The stock market manipulation cycle has ...
Read More
Is everyone losing money in the stock market

Is everyone losing money in the stock market?

Investment Behavior and the Perception of Losing Money in the Stock Market Feb 18, 2023 'Tis with great veracity that ...
Read More
Short-Term vs Long-Term Investing Strategies

Short-Term vs Long-Term Investing Strategies

February 16, 2023 Surviving Stock Market Volatility: Short-Term Investing Strategies Investing in the stock market can be a wild ride, ...
Read More
Financial Stress Index

Understanding the Kansas City Financial Stress Index

Understanding the Kansas City Financial Stress Index: A Comprehensive Guide to Assessing Market Risk and Opportunity February 15, 2023 The ...
Read More
Minimizing Losses in the Stock Market

Minimize the Risk of Losing Money in the Stock Market

Embracing a Contrarian Approach to Minimize the Risk of Losing Money in the Stock Market Feb 14, 2023 Losing money ...
Read More
Long term investments

Securing Your Future: The Power of Long-Term Investments

The Pros and Cons of Long-Term Investing: Building Wealth Over Time February 13, 2023 The stock market can be confusing ...
Read More
Investment style

Investment style: Going Against the Grain

February 12, 2023 Investing is a complex and multifaceted field, with various methods and strategies to choose from. Among the ...
Read More
Mastering Money: Your Financial Playbook

Mastering Money: Your Financial Playbook

Mastering Money Feb 13, 2023 The stock market is a complex and dynamic entity that can be difficult to predict, ...
Read More
The Importance of Keeping a Trading Journal

The Importance of Keeping a Trading Journal

Trading Journal: The Road to Financial Success Feb 8, 2023 Investing can be challenging, and every investor's experience is unique ...
Read More
Exploring the Intersection of Investing and Murphy's Law: Supporting Research and Insights

Exploring the Intersection of Investing & Murphy’s Law

Murphy's Law & Losing Feb 11, 2023 The behaviour of investors during bullish and bearish market phases has long been ...
Read More
War of Attrition: Strategies for Thriving in Times of Crisis through Investment

War of Attrition: Strategies for Thriving in Times of Crisis

War of Attrition Feb 6, 2023 This chart contains data going back to 2000. The main point here is to ...
Read More
Dow Jones Outlook

Dow Jones Outlook: Understanding the Dangers & Rewards of Crisis Investing

Feb 5, 2023 The monthly chart of the Dow highlights the Path it and general markets follow could be similar ...
Read More
Financial Stress

Financial Stress: The Surprising Opportunity for Savvy Investors

Feb 10, 2023 Contrary to popular belief, financial stress can present a unique opportunity for savvy investors in the stock ...
Read More