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Strong

Many Are Betting on a Calm Market. We're Not.

Here's one good reason why: a historic market sentiment extreme

By Elliott Wave International

The DJIA, S&P and NASDAQ are struggling to bounce. Yet the bullish convictions remain high. Says a February 5 Investor's Business Daily headline:

"Why Mutual Fund Investors Need Not Panic After January Sell-Off"

When is the best time to get out of the stock market? When everyone else is invested and extremely optimistic. When is the best time to buy, then? Exactly: when you see the opposite sentiment.

Market sentiment is one indicator you don't hear much about on financial networks. Yet we've seen sentiment extremes repeat at every recent market top and bottom. What's more, as Robert Prechter, the president of Elliott Wave International, puts it, "the greater the degree of the advance that is ending, the greater the optimism at its peak."

This contrarian view of the market can be a financial lifesaver.

Below is an excerpt from Prechter's recent Elliott Wave Theorist, a monthly newsletter he has published since 1978. It shows you one way how Bob finds bearish and bullish extremes in the market.

Conviction Among the Bulls
(Robert Prechter, The Elliott Wave Theorist, December 2013)

The Daily Sentiment Index (trade-futures.com) reported 93% bulls twice, on November 15 and 22. Two readings this high are a rarity.

The weekly Investors Intelligence poll on December 11 and 18 showed over 80% bulls among committed advisors (i.e. bulls/(bulls+bears), omitting those expecting a correction), the highest reading since 1987.

Such extreme readings in conjunction are even rarer.

The Rydex family-of-funds data afford good sentiment indicators. Recent figures show a record low investment in conservative money-market funds, meaning nearly everyone is invested in stocks and bonds.

At the same time, the ratio of money in bullish stock funds vs. bearish stock funds is over 5:1, and per sentimenTrader.com the ratio of money in leveraged bull vs. bear funds (see Figure 2) is 10:1!

This reading leaves past extremes in the dust. If you study Figure 2, you will notice that the biggest rush has come in the past six months, which is precisely the time that stocks' ascent has been slowing!

In other words, optimism is soaring while upside momentum is waning.

Once this epic complacency melts, I doubt we will see such a ratio again in our lifetimes.


Bad Start for Stocks in 2014: Buying opportunity or more pain to come?You can benefit greatly from looking at charts that take a historical look at what's going on in the financial markets. Robert Prechter has just released an issue of his Elliott Wave Theorist publication that includes 15 charts of the S&P 500, NASDAQ, gold, and mutual funds -- along with his analysis.

With this information, his Elliott Wave Theorist subscribers are now prepared for 2014. And you can be, too, because you can get the full 10-page issue, FREE.

Download your free 10-page report now >>

This article was syndicated by Elliott Wave International and was originally published under the headline Many Are Betting on a Calm Market. We're Not.. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Comments

  1. major says:

    Many folks have tried to find a mathematical model for market behavior and fallen short. If such a model existed those folks would be instantly rich forever. Hence Elliot wave, fibannocci numbers, etc; none of them have proven sufficiently reliable and are relegated to being nothing more than advanced indicators at best. Chaos theory and fractals are the latest attempts to characterize the seeming randomness of market behavior. But its the inflection points of markets that describe significant changes in trends and where market players will make their profits if lucky. the new math models cant reliably predict these as yet.

  2. Venki Prathivadi says:

    I have been a keen follower of Robert Prechter and EWI since seven years. I really like the concept of Elliott Waves and I think it does provide an important perspective to market context. I regularly subscribe to their newsletters.
    I have formed a view, since the last 18 months, that while Elliott waves are useful for analysing the markets from a longer-term investment objective they are not consistently useful for day to day trading. Prechter and EWI have adopted a doggedly perma-bear outlook since the last two years calling for a top. That view has cost traders like me a lot of money. In my humble view they may have made a "Primary degree error" in their analysis, perhaps even a "cycle degree error". Yet they have not changed their stance. When markets make a new high above the 31-Dec-2013 high in Dow and 14-Jan-2014 high in S&P500 they will yet again revise their wave counts. That is easy to do on newsletters. What hurts is the erosion of trading capital for traders that follow subjective analysis and advice, regardless of the fine print. None of the "Expert Analysts" will admit that they were wrong.
    Lesson learnt - Ignore the noise made by Permabears and Permabulls. Just follow the Price action, objectively and trade what you see - not what others think should happen in future based on the past of present. No matter who those others are. You are not trading their money. Finally, tops and bottoms don't matter to trading. It is impossible to catch them.

    • JayaramIyengar says:

      I fully agree and endorse the views expressed above by Mr. Venki Prathivadi.
      Now thanks to expert technical analysis and good trading principles from experience traders and experts like Venki Prathivadi and Dr. Van Thorpe, I now understand that only three things that matter for a trader " Price" is intelligence, "Volume" is truth and "Trend" is our friend.
      All future predictions , theories and subjective analysis is OK for understanding the market context but it is only a "noise" which distorts the simple fact of " Price Action", which matters most to traders and investors.
      It is hard to say today "what the bottom is ? " or "what the top will be tomorrow " ?.

  3. Philip says:

    The "stupid" factor is back in stock valuations, that much is certain.

  4. joeldee says:

    As long as Market sentiment remains so bullish, the dip buyers will keep stepping in. This will create strong volitility up while buying and down as the bigboys keep selling. Soon the dips may tire and then what? To think that this needed correction should stop at 5% and then pop makes it difficult for me to invest so I will wait. I only wish I could see an upside catalyst, but I'm just not smart enough. Inflation would work for me, but everywhere the talking heads speak of deflation (except at the supermarket for most of us "know-nothings"). If someone sees an upside catalyst out there, please let us know!!!!!!!!!

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