This cartoon in many respects reflects the swings in sentiment as well as the role that fear and greed play in the stock market.
Though it plays a role in the direction of stock it is often not easy for the investor or trader to recognize these extremes in sentiment.
In January and February 2016 the bullish % according to AAII hit the lowest levels since 2005. That combined with the positive technical signs indicated an important market bottom was forming.
There is one technical indicator, the ARMS Index, that does identify most panic selloffs.
It was developed by an old friend Richard Arms. I was fortunate enough to spend three weeks giving presentations throughout Asia with Dick and his wife.
Very high daily levels in the ARMS Index often identify days of panic selling. This indicator was discussed last year in Avoiding Panic Sell Offs.
There have been many sharp declines in this bull market like the one in early 2014. The S&P had dropped 6% since the start of the year and the selling accelerated in early February.
The February 3rd USA Today headline exclaimed “Dow tumbles 326 points” and they noted “investors were clearly afraid”.
The ARMS Index closed at 3.42 on February 3rd and most of the market averages made their lows in the next two days.
The S&P 500 rose over 8% in the next month but unfortunately many sold out on the lows and did not get back in the market.
In my weekend article The Week Ahead: Don’t Let The Euphoria Change Your Plan I urged investors and traders not to ignore the risk now that everyone is so bullish on stocks.
A poor entry price could hurt your portfolio once the market does correct.
Like the other corrections that have occurred in this bull market I expect the A/D line analysis to again warn me in advance of a correction.
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