Indicators of market statistics and sentiment are important to gauge whether market trends are going to continue or on the verge of switching gears. For the trader, the ideal situation is reading the current conditions, making an assessment and trading the trend in the right direction. We examine and analyze so many different indicators, and we can be thrown off course very easily, swayed by the insignificance of an indicator that does not give us a proper read on direction.
But, when the preponderance of evidence weighs in substantially in favor of a trend, trying to be the contrarian can lead to fatal consequences. That is because trends can stay strong for much longer than we believe, even if the odds are stacked high for a reversal. Currently, we have indicators pointing toward an overbought market, which is sitting at/near all-time highs. That might lead one to believe buyers are tapped out and the only ones who remain are sellers – is that true?
Currently, the VIX is oversold which expresses market complacency. Put/call ratios are very low, also indicating an overbought sentiment reading. Oscillators are neutral while sentiment polls are mostly too bullish (these are usually contrarian indicators). Lastly, some components of the CNN/Fear & Greed Index are flashing extreme greed – giving the composite a reading nearly the max of 100. Many would think the market is due to retreat as that has been the case historically, as these indicators/sentiment have been strongly in this camp for many weeks.
We are not in the business to tell the market what it should do, rather we look for the clues that tell us how the market is going to move.
An overbought condition can stay that way for a very long time, far longer than anyone could imagine. Overbought conditions are a symptom not a cause. Price action is king and will lead these indicators bullish or bearish. Markets continue to rise and this can be seen on nearly all timeframes, so we will stick with the trend and trade the markets accordingly.
