The Luke Combs, “Lovin’ On You” Stock Market (And Sentiment Results)


Winston Churchill

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Another finding from this month’s BofA survey was that investor optimism skyrocketed to levels not seen in almost a decade. However, when you look closely to the last three times (green vertical lines I added) that optimism (Fund Managers Over-Weight Equities) jumped above the top horizontal dotted line after being below the bottom dotted horizontal line (2012, 2009, 2003) it was a great time to be buying equities (even after the big initial move).

What’s Bad is Good?

Last week we went through a number of factors that people were pointing to in order to justify why we are due for an immediate crash. We pointed out that if you take a few steps back and take a longer view, many of the “negatives” where actually BULLISH in the intermediate term.

This week, there are a couple more:

Sarah Ponczek from Bloomberg posts great charts/tables. You can follow her on Twitter.

So while the short-term “90% of stocks above 200 DMA” looks overbought, the last time it got this “overbought” was 2009. Would you want to be a buyer or seller in 2009?

Now onto the shorter term view for the General Market:

In this week’s AAII Sentiment Survey result, Bullish Percent (Video Explanation) dropped to 43.43% from 48.06% last week. Bearish Percent flat-lined to 26.29% from 26.86% last week. We are still at an extreme in sentiment for retail investors.

Just like last week – while this is still an extreme in short-term sentiment and should be heeded in the short-term – it is important to note in the chart below, that while similar levels presaged a short term top in early 2018, they occurred near the beginning of a longer term uptrend at the end of 2016-2017 (right after the last Presidential election).

We noted the similarities between the pre-election stock-market in 2016 versus 2020 in our October 29, 2020 note. It has played out exactly according to script ever since, which is why I am inclined to give this extreme level in sentiment the same “benefit of the doubt” as late 2016. Just like then, most managers were off-sides and flat-footed going into the election and had to panic into the market to play “catch up” before year-end.

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The CNN “Fear and Greed” index dropped from 80 last week to 69 this week. You can learn how this indicator is calculated and how it works here: (Video Explanation)

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And finally, this week the NAAIM (National Association of Active Investment Managers Index) (Video Explanation) flat-lined at 106.11% this week from 106.74% equity exposure last week. As we said before the election, managers would have to chase into year-end – and they are now doing just that. As you can see over the past five years, this level of extreme warrants caution but is not always indicative of a top.

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