As a fan of investor psychology, I find sentiment intriguing. Measuring it is a challenge. We can’t trust what people say because they become bullish after they buy and bearish after they sell, convincing themselves that past trades were the correct way to go. Humans are notorious liars — especially to themselves. When they are not lying, they often can be found busy making excuses and other rationalizations for their actions.
Hence, we need to find more objective ways to view and measure sentiment.
One of his recent comments has been making the rounds on social media. Paraphrased to remove the trader jargon and hyperbole, it read something like this:
The SPX has traded more than half a percent above its five-day moving average for 10 consecutive trading days in a row. In the prior 75 years, this has only happened twice — in 1982 and 2002. Each time it marked an end of a multiyear bear market. In other words, this is a rare rip higher that has only occurred previously at the end of multiyear bear markets. Each time it happened came after a mild, four-week drop. It’s incredibly uncommon and wholly unexpected.
The market condition that Goepfert is describing can best be called “persistently overbought.” As we have noted before, persistently overbought stock markets reflect strength and demand for equities, often in a period of deep pessimism. That’s seems like a pretty good description of current conditions.
I contacted Goepfert to see if he could provide more insight into what this unusual sentiment reading means. After all, sentiment measures are notoriously fickle, and tend to generate more noise than signal — the exception being when they reach extremes.
Which was exactly his point. On Oct. 15, SentimentTrader’s metrics reached just such an extreme. Out of 85 measures he tracks, 43 reached unusually high levels of pessimism all at once. That many metrics pinning the needle at the same time has only happened at other intermediate-term lows, according to Goepfert.