If one looks at the history and examines stock sentiment data, one will immediately spot something strange. When everyone is bullish, the average Joe jumps in, and when the crowd is in a state of disarray, this same individual dumps the baby with the bathwater. If this was a new phenomenon, we could call it a non-event, but this strange behaviour has been going on for decades. One would have thought that the individual investor would wise up; buy when the crowd sells and sell when they turn euphoric. However, like groundhogs day and with the precision of laser-guided missile, these fools do precisely the same thing and scream bloody murder when they lose their savings.
Long term chart of Neutral Sentiment
While most experts focus on bullish and bearish data, we prefer to pay attention to the people who are in the neutral camp. For these chaps represent bulls with no B***S and bears with no teeth. So when the number of neutral individuals surges past 45, one should start compiling a list of top companies and wait for the ensuing pullback to open new positions. Neutral sentiment does not surge past 45 often, so when it does occur, remember the saying snooze, and you lose
Final thoughts on stock sentiment
This is the market of disorder, and thus, one has to be prepared for the unexpected. The only thing that will not change is that disciplined investors will continue to win, while those that trade based on whims will lose. We did not take profits because we are sure the markets are going to correct. We took profits because it’s prudent to do when bullish sentiment surges to levels not seen for 24 months and the markets are trading in the overbought ranges (on the weekly charts). As we stated, if the markets don’t pullback, the only change to our game plan is that we will aim for more conservative entry points until the market’s pullback. The markets always pullback once they are trading in the overbought to extremely overbought ranges. It’s just a question of time. Hence one has to be patient, and if there is a waiting period, we will only be more selective with our picks.
Other Articles of Interest