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This Sentiment Measure Nearly Matches October 2007

"Traders are convinced that market volatility will remain nonexistent."

by Bob Stokes
Updated: February 17, 2017

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[Editor's Note: The text version of the story is below.]

On Feb. 16, the DJIA continued its winning streak, ending the session at 20,619.77, the sixth consecutive all-time closing high.

This does not surprise us. Our January Elliott Wave Financial Forecast said:

The wave structure of the rally does not appear complete.

However, Elliott wave price patterns aren't the only indicator we watch. We also keep an eye on market sentiment, a reflection of investors' collective psychology.

Investor psychology swings back and forth between extremes of optimism and pessimism. And, today, financial optimism is historically high.

Review this chart (wave labels available to subscribers) and commentary from our February Elliott Wave Financial Forecast:

The percentage of bulls in the weekly Investors Intelligence Advisors' Sentiment Survey surged to a Fibonacci 61.8. This optimistic extreme essentially matches the 62 reading that attended the October 2007 market top. The only higher percentage since 2007 occurred during the week of June 9, 2014, when the reading was 62.6, less than a point above current levels. The current degree of optimism is consistent with [our Elliott wave count].

And there's more evidence that optimism is in nosebleed territory.  This chart and commentary from our Feb. 15 Short Term Update tells the story:

This chart shows how sentiment is naturally aligned with the late stages of [the current Elliott wave]. The middle line on the graph is Jake Bernstein's Daily Sentiment Index on stocks (trade-futures.com), which has pushed to 89% as of last night's close, its highest level in over three years (Nov. 2013).... The bottom graph shows the CBOE Volatility Index (VIX) DSI ... inverted to align the data with stock prices. The VIX DSI dropped to just 5% as of the close on Feb. 14, which matches the lowest percentage of VIX bulls since mid-July of 2015. In other words, traders are convinced that market volatility will remain nonexistent ....

Yes, many investors have become all too comfortable with the market's prolonged uptrend. A financial firm's chief market economist put it this way (CNBC, Feb. 16):

"I think the market has a problem here, and that is complacency."

As we've noted before, periods of low market volatility are followed by periods of high volatility. When the change occurs, most investors are usually caught off guard.

It's an especially important time now to keep your eye on the market's unfolding Elliott wave pattern and supporting indicators we regularly track in our publications.

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