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U.S. Stocks: An “Optimism” Indicator Hits a 13-Month Extreme

Waves of pessimism and optimism drive financial markets

by Bob Stokes
Updated: December 03, 2019

It's ironic, but stock market prices usually turn up when investors reach a pessimistic extreme. When everyone gives up, prices have nowhere to go but up.

Let's go back to February 20, 2009. A brutal bear market had been in place for 16 months, and the Daily Sentiment Index (trade-futures.com) had recorded only 3% bulls. In other words, 97% of investors expected the then bear market to persist.

Well, just 17 days later, stock prices bottomed and began an upturn that has lasted for more than 10 years, the longest ever.

By the same token, stock market prices usually turn down when investors' bullish convictions reach an optimistic extreme.

The downturn may not start the next day or even the next week. Yet, taking a bullish stance when almost everyone else is bullish is usually financially dangerous.

Keep that in mind as you take a look at this chart and commentary from our Nov. 27 U.S. Short Term Update:

13monthoptimisticextreme

Besides the diminishing peak a/d readings of each advancing wave from October 2, bullish sentiment is high. This week's results of the Investors Intelligence Advisors' Survey show market bulls have increased to 58.1%, which is a 13-month extreme. According to Bloomberg, the bull-bear spread ranks in the 95th percentile of the II data going back 30 years.

So, yes, investors have been extraordinarily complacent.

As a Nov. 30 headline from a major financial website says (Marketwatch):

4 reasons why this bull market in stocks will keep going in 2020

The sentiment in that headline may prove to be correct.

Yet, our analysts provide you with a sobering perspective on why you may not want to join the "fear of missing out" crowd -- and this analysis goes way beyond sentiment measures.

In fact, the recently published December Elliott Wave Theorist discusses a price range for the Dow Industrials based on "a cluster of Fibonacci relationships."

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