The stock market moves in cycles. Traders are led to believe there has to be some type of catalyst to make the SPX (S&P500 index) move up or down. I get a ton of e-mails all the time asking “Why would you think the market will head lower/higher without any catalyst?” Yet nobody can tell me why we turned lower in September and then higher in October.
The Financial Media Lags
Traders get a majority of their information from the financial media. For the most part, the financial media will always be lagging the current move, as they are still reporting why we are heading the other way.
When the SPX bottomed on our exact turn date of October 15th, it rallied some 100 points off the lows and the media was still wondering where the low would be? When we topped on our exact turn date in September, the SPX dropped some 100 points before they stopped reporting “how high can the SPX go before topping?
Avoid The Herd Mentality
When did everyone turn bullish off the October 15th lows? Being that traders are creatures with a “herd mentality,” nobody believed the lows were in until the SPX got back above 1971, which was almost 150 points off the lows already, because that was the 50 DMA.
Now we are at all-time highs and nobody can find a reason why we will move lower. Nobody is anticipating the sentiment cycles and only reacting once the reversal is already in full gear. Then they panic and buy at the highs and sell at the lows.
Follow The Herd And Then Reverse
Bullish and bearish cycles will repeat. Sentiment cycles have been very predictive over the last 2 months. Follow what the majority is doing and position yourself for a reversal at extremes.
For more information about investor sentiment, click here.
