Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20
Facebook (FB) AI Mega-trend Tech Stocks Investing 2020 - 10th Feb 20
The US Constitution IS the Crisis - 10th Feb 20
Stock Market Correction Continues - 10th Feb 20
Useful Tips for Becoming a Better Man - 10th Feb 20
Will CoronaVirus Pandemic Trigger a Stocks Bear Market 2020? Part1 - 9th Feb 20
Could Silver Break-out like it did in 2011? - 9th Feb 20
The End of the Global Economy - 9th Feb 20
Fed to Stimulate in Any Crisis; Don’t Let Short-Term Events Bother You - 9th Feb 20
Is The Coronavirus bullish for Stocks? - 8th Feb 20
Ryzen 9 3950X Best UK Custom PC Builder 2020 - Scan.co.uk vs Overclockers.co.uk - 8th Feb 20
Warwick University Offer Holders Open Days 2020 - Visitors Car Park 15 Parking - 8th Feb 20
The Historical Impact of Recessions on Gambling Activity - 8th Feb 20
UK Points-Based Immigration and Its Effect on the Job Market - 8th Feb 20
British Pound GBP Long-term Trend Analysis - 7th Feb 20
The Case for Buying Precious Metals - 7th Feb 20
Vacuum Cleaner Features You Need To Know - 7th Feb 20
How to Shrink Financial Market "Maybes" Down to a Minimum - 7th Feb 20
Stock Market Broad Sector Rotation Starts In 60+ Days – Part I - 7th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stock Market Sentiment Not A Barrier To Further Gains

Stock-Markets / Stock Markets 2011 Dec 22, 2010 - 10:08 AM GMT

By: Chris_Ciovacco

Stock-Markets

Best Financial Markets Analysis ArticleThere are currently several reasons to be concerned about the stock market, from debt problems in Europe to slowing technical momentum. However, if investor sentiment is currently at the top of your list of concerns, you may want to bump it down a few notches.

Stock market sentiment relative to a bullish or bearish outlook can be used as a contrary indicator for stock prices when it reaches extremes. If you follow the markets closely, you have run into an article or two making the case that a correction or bear market is imminent based on the current state of extended bullish sentiment.


We, like many familiar with the power of using sentiment, have been concerned in recent weeks. Since the longer-term outlook from a technical and fundamental perspective still appears to support higher stock prices over the coming months, we decided to ask the man who literally wrote the book on stock market analysis. Robert W. Colby, CMT (www.robertwcolby.com), author of The Encyclopedia of Technical Market Analysis, was kind enough to give us his perspective of the current state of the Investors Intelligence Bull/Bear Ratio. Here is what Mr. Colby had to say:

On advisory service sentiment, there were 56.8% bulls versus 20.5% bears as of 12/15/10, according to the weekly Investors Intelligence survey of stock market newsletter advisors. The Bull/Bear ratio stands at 2.77, which is between one and two standard deviations above the long-term, 20-year mean. This is not overly excessive bullish sentiment in the second year of a bull market. Bullish sentiment tends to rise in November and December. The ratio was as high as it is now or higher in Decembers of each year 2003, 2004, 2005, and 2006, and none of these “high” readings led to bear markets. The 20-year range is 0.41 to 3.74, the median is 1.54, and the mean is 1.61.

The VIX Fear Index fell below 8-month lows to 15.46 on 12/17/10, reflecting diminishing fear among options players. VIX is near its 3-year low of 15.23 set on 4/12/10. Before we take the current level of VIX as a sell signal, however, we might consider that VIX was as low as 9.89 on 1/24/07, nearly 10 months before the final tops in the price indexes. VIX is a market estimate of expected constant 30-day volatility, calculated by weighting S&P 500 Index CBOE option bid/ask quotes spanning a wide range of strike prices for the two nearest expiration dates.

Mr. Colby also forwarded a copy of the chart below. We added the green boxes and lines, which show periods where sentiment rose from depressed levels to elevated levels similar to what we have today. The Bull/Bear ratio is shown at the top and the Dow Jones Industrial Average is shown at the bottom. Notice how stocks were able to continue to post gains after the highlighted periods of extended sentiment.

We took Robert W. Colby’s chart (above) and calculated the market’s historical risk-reward profile for the cases highlighted with the green boxes from 2003, 2004, 2006, and 2009. As investors, what we should care about is how the market behaved after similar circumstances in the past. We need to examine the magnitude and frequency of the bullish outcomes relative to the magnitude and frequency of the bearish outcomes to better understand the risk/reward profile of the current market as it relates to sentiment. The table below shows the S&P 500’s performance between two weeks and six months after sentiment rose from very depressed levels to a bull/bear ratio of 2.77. Roughly 80% of the outcomes for stocks were very favorable; roughly 17% were unfavorable (but not enough to warrant selling), and about 4% of the cases resulted in losses on the S&P 500 of 3% or more. That actually looks pretty bullish (lots of green below). The S&P 500 was higher in all four cases six month later.

The second line of the table below (see 5.5 months) shows in the four cases studied (2003, 2004, 2006, and 2009) the S&P 500 posted gains three times (75% of the outcomes) and a loss in one case (25% of the outcomes). The average gain in the three positive cases was 7.99%. The loss, five-and-a-half months after the elevated level of sentiment, in the single negative case for stocks was 2.16%. If history produced wins in 75% of the cases and the average gain was 7.99%, those outcomes compare very favorably to the one case that posted a loss of 2.16%. Hence, the favorable risk-reward ratio of 11.12 shown at the far right of the 5.5 month line.

The table above tells us the next two to eight weeks have favorable outlooks from a risk-reward perspective based on sentiment. The outlook for the next 2.5 to 3.0 months is favorable, but somewhat mixed. The picture improves again looking out 3.5 to 6.0 months.

To get another perspective of the big picture, we also looked at the current readings of the CCM Bull Market Sustainability Index (BMSI) and 80-20 Correction Index relative to the periods studied above. The results, shown below, also paint a picture where further gains in stocks, and risk assets, seem within reach.

Ned Davis, of Ned Davis Research, does his homework. From a recent MarketWatch article:

Needless to say, the disturbingly high levels of bullishness that exist today don’t necessarily doom the market. Ned Davis, for one, is giving the rally the benefit of the doubt until it reverses direction, and he is therefore rated moderately bullish.

Even after performing this analysis, we remain concerned about the current state of sentiment. However, we are far less concerned having a better handle on a few historical cases. With numerous concerns in the fundamental and technical realms, we have moved sentiment down the list of reasons to toss and turn at night. As we stated in our 2011 Outlook, we will continue to give the bulls the benefit of the doubt until we see evidence to the contrary.

By Chris Ciovacco
Ciovacco Capital Management

    Copyright (C) 2010 Ciovacco Capital Management, LLC All Rights Reserved.

    Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

    Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. As a registered investment advisor, CCM helps individual investors, large & small; achieve improved investment results via independent research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions. When looking at money managers in Atlanta, take a hard look at CCM.

    All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

Chris Ciovacco Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules