Euro Stoxx 50: Sentiment Hits “Bellringing” Extreme
Sentiment extremes often serve as contrarian indicators.
by Bob Stokes
Updated: June 07, 2023
Bull markets usually start when sentiment is extremely bearish, and bear markets usually kick off when most everyone is bullish.
The main thing to keep in mind, though, is that sentiment indicators are not short-term timing tools. Just because a given sentiment measure reaches an extreme doesn't mean an investor should invest in a contrarian manner the next day. Extremes can persist longer than observers might anticipate.
That said, sentiment indicators can provide a useful backdrop when combined with technical analysis.
Consider the investing sentiment in Europe. Back on March 5, The Financial Times had this headline:
Beware the European optimism trap
Indeed, let's look at a sentiment indicator which was in the extremely optimistic category for the better part of five years. This one is related to the Euro Stoxx 50. Here's a chart and commentary from our June Global Market Perspective:
The European Commission Economic Sentiment Indicator... pushed to bell-ringing extremes at both of the stock market's two major tops in 2000 and 2007... Those extremes were actually exceeded in September 2021 when the indicator pushed to an all-time high of 118. The reading closely coincided with reversals in the Euro Stoxx 50, the Stoxx 600, the DAX, and the CAC 40... Aside from its brief plummet during Covid-19, sentiment has remained pinned at an optimistic extreme for the better part of five years.
Yes, sentiment extremes can stretch out for a long while, but as you might imagine, they don't last indefinitely. And the European Commission Economic Sentiment Indicator has already shifted to the downside.
Another thing to keep in mind is that if an extreme persists for years, then usually the opposite sentiment stays in place for a long while once it's reached.
As stated above, besides sentiment indicators, it's worthwhile to keep an eye on a financial market's "technicals," as well as its Elliott wave structure.
Our June Global Market Perspective shows a compelling trend channel of the Euro Stoxx 50 which has been 15 years in the making.
Check it out, plus get our analysis of other major global stock indexes, as well as interest rates, cryptocurrencies, gold, silver, forex, crude oil, natural gas and much more.
Follow the link below to get started.
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If you've been around the investing game for a while, you know that market opinions are a dime a dozen.
Cut through the clutter by using EWAVES, which provides unbiased Elliott wave analysis for financial markets in our Global Market Perspective. Here's a quote:
EWAVES considers only its raw input, comprising price and time data. It does not read news publications, and it knows nothing about anyone's market opinion. The way it operates is the epitome of unbiased wave analysis.
EWAVES can now quantify the extent to which individual markets adhere to the Elliott wave model, a measure we call elliotticity. Markets scoring at 90%+ are about as good as real markets get in terms of model conformance. [emphasis added]
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