Sentiment is your Stock Market Tracker
“The journey to the light starts with a candle. Once it's lit, darkness has gone forever.”
― Adriano Bulla
While it may not be apparent in the press, things are improving.
In fact, a tectonic shift is underway.
And those awaiting the return of normal are missing the point.
Our understanding of "normal" is a signpost on a pathway we sped past long, long ago.
Today is more likely defined at how willing you are to remain flexible and envision the benefits of the future racing toward us at light speed, even as we trek through a dismal yet life-changing window in our history.
If you get stuck in the dismal part, you risk remaining there for an awfully long time.
The last weeks of the doldrums are dead ahead.
Long-time readers know that we typically see a return to regular levels of market volume and participation at the end of the week that follows the Labour Day break in America.
We expect this week and next to be the highest volumes of the year…but that could also be wrong.
After all, I have as yet been 110% incorrect in looking for a normal summer swoon, though I’ve a feeling in my gut that it's still out there.
So, I will suggest yet again that if we do not get a mild rest, choppy pause, or even a small corrective wave to spook a few investors before the train leaves this station the message will be clear.
The market will be suggesting that the massive fear and depth of concern has completely missed how strong companies are adapting, and how "the new normal" will be vastly better than what many may think they are awaiting.
Remember that it took from the lows of 2009 to the first-of-year highs of 2018 for the crowd to "feel good again about stocks."
Sentiment was your tracker the entire time.
And it still is.
The latest AAII data is sitting almost idle as new stock market highs are crested. Disbelief and fear remain strong.
This aligns nicely with the Yale "Crash Confidence" stats from last week. Even now, 70% of the audience is, well, not so confident about stocks with a bullish reading of just 30%:
The above data meshes with the Lipper Fund flows data that shows $10B came out of equity and went into bond related funds in the latest read. Meanwhile 10-years are priced at over 140+ P/E's, an absolute sure way to lose capital over the holding period.
The scariest part of equity investing is how history proves that the highest future values for stocks are often defined when the public is racing for bonds - at any price - even at 140+ times earnings.
The chart above from Bespoke is a view of Yale's Crash Confidence reading for individual investors going back to 1999.
Please note, it’s a bit backwards in how it's presented, as low readings mean that a low number of investors are not worried about a stock market crash.
This means the lower the reading, the higher the worries are about an upcoming market crash.
Similarly, higher readings suggest an increased level of investor complacency.
Now, here’s an indication of what happened next after the previous times when we felt this bad:
Have a look at how markets may have indeed chopped around for a bit in those circled areas (above), but they did not go significantly lower AFTER those fear levels were reached.
What will be critical over the next few months is for you to remember to stay focused on "what’s next" and not on "what’s happening now."
Oh, and pray for that corrective wave.
If we’re fortunate enough to get one, then it will likely be the last for a while.