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The Public Buys the Dip, the Rally – and the High?

There's "no fear here," which tells you volumes about the trend

by Bob Stokes
Updated: November 08, 2018

Stock market optimism dies hard.

Even with all of the volatility in October, there's "no fear here," says EWI's Oct. 29 U.S. Short Term Update.

The publication also showed this chart and said:

PublicBuysDip

The chart shows the daily E-mini S&P futures as the top graph and the weekly Commitment of Traders data in the bottom graph. The bottom data plots the net number of futures contracts held by Small Traders [or "the public"] as a percentage of open interest. Similar to Large Speculators, the public tends to become more bullish as prices rise and more bearish as prices decline.

A market pullback into June coincided with a Small Trader net position that soon turned negative, as investors feared even lower prices. But as the E-mini S&P contract wound its way higher … , the public regained their nerve and increased their net-long positions in conjunction with stocks' push to their ... peak. The public was making a strong bet on a continued rally just as prices turned lower from the 2947.00 top on September 21. Normally, as prices decline, Small Traders become more bearish. But the chart shows just the opposite: The public bought the dip. The E-mini contract declined nearly 11% but Small Trader net-long positions increased throughout.

Of course, "buying the dip" means Mom and Pop investors remain optimistic about the stock market, but this category of investors is not the only one that anticipates a rally.

The "big money" also sees substantial gains ahead. This is from Barron's (Oct. 19):

Stocks Will Rally More Than 10% in 2019, Big Money Poll Predicts

America's money managers seem confident that the aging bull market in U.S. stocks can trot into its 10th year in 2019. Based on the findings of Barron's fall Big Money Poll, 56% of professional investors are bullish on U.S. equities through next June....

The public and money managers might be right about stocks.

Then again, many of these optimistic investors may not be familiar with the market's Elliott wave structure.

We've seen such sentiment readings before, almost always near critical junctures, and almost always with critical implications for what lies ahead.

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