The excessive optimism in equities have gotten so extended that the bullish sentiment-expectations that the stock market will rise over the next six months, stayed above 40% on back-to-back weeks for the fourth time in 16 weeks, according to the AAII sentiment survey. The total calls bought to open has now risen to record levels never seen before.
As a contrarian, you would exercise immense caution when optimism extends far away from the average and unsurprisingly, the pandemic du jour kicks in and shakes up the sentiment. Then there was this from market wizard Leon Tuey:
“Sentiment is a contrarian indicator. Excessive pessimism/fear is witnessed at the bottom of a correction/bear market and excessive optimism is seen at market tops. As the market corrects, bullish sentiment subsides, and bearish sentiment rises and at the bottom of a correction, fear surges. Conversely, as the market rallies, bullish sentiment rises, and bearish sentiment subsides. At the top of the rally, bearish sentiment hits a low ebb and optimism becomes excessive”
Given that the past is prologue, we revisit some of the past corrections with the chart below. On average, the equity market took approximately 60 days to bottom for all the declines and approximately 40 days on average for the declines less than 10%, since 2009. During this period of consolidation or bottoming, the markets have often replenished energy for the next move forward.
Source: yardeni.com. Standard & Poor’s
We will continue to monitor the financial market conditions and keep you abreast of further developments. If you have additional questions about your investments, please feel free to contact your Wealth Advisor at Marshall & Sterling Wealth Management.
“Fate whispers to the warrior, 'You cannot withstand the storm.' The warrior whispers back, 'I am the storm.'” -- Unknown.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
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