With markets at/near all-time highs it’s a wonder why sentiment is so poor. Aside from the VIX, which shows complacency in the low teens, polls, put/call ratios and high/low indicators are not reflecting any sort of bullish sentiment. Good news for the bulls. Why? That would probably in turn become bullish as a contrarian indicator – too much bearish sentiment is bullish.
Let me explain.
Most times, the crowd is often leaning to one side or the other at exactly the wrong time. We see this happens in both bull and bear markets. Back in February this year the bearish sentiment was so thick you could cut it with a knife, and when everyone seemed to just throw in the towel mid-month, institutional buyers stepped up and took the market higher while most were sitting on the sidelines in wonderment.
This happens time and again, playing the stock market is no easy task. Extreme moves are common in markets, but they do end with an emotional outburst of euphoria or capitulation. However, with an understanding of sentiment and how often it swings widely we can set ourselves up for a favorable move. I will often put trades on against the ‘crowd’, and with some patience and good timing this will work out favorably.
