We talk often about market sentiment as a way to find entry/exit points. As contrarian traders/investors, we look to see when the boat is tilted to far to one side or the other. Recently, the AAII (individual investors) was sporting rather large skew to the bear side, the highest since December 2018. On the same side, the bulls were at their lowest point, also near those lows of December 2018.
Why reference last winter? As you recall, markets were slammed mercilessly following a policy error by the Federal Reserve. The committee decided to raise rates a fourth time last year, believing they were fighting inflation. That trick didn't work and the markets were slammed by sellers until Santa Claus made his late night run.
Sentiment turned sharply then and it will now, eventually. Most are concerned and nervous about the economy, and that's a fair worry. We talked in last week's blog about the endless worries that surround the markets.
Currently, with earnings season underway and some seasonally strong trends in front of us it seems counterintuitive for sentiment to be uber bearish - but it is. The AAII is not the only signal, as one sees the put/call ratio climbing (investors buying protection against a potentially precipitous drop).
With markets within striking distance of all time highs, breadth solid and stocks showing decent earnings, it may be time to go against the grain here. Though we like a market that has momentum (stocks are stuck in a range), the amount of fuel available (money on the sidelines) could be like tinder.
Continue being cautious and careful, as always carry some protection just in case the markets have a meltdown. We've been up in this area a couple of times this year and each time there was a fall. Hence, hedge that risk by adding some cheap market puts. But the wall of worry is up, and tells us markets could easily move higher.