Where are we on the Sentiment Cycle chart? That question has been one of the most asked ones in my inbox for the last few weeks. So let's explore it today.
In May, I said I think we are just to the right of 'buy the dip'. I thought the mid-May low might have been Panic and June might have been Discouragement. That meant the summer rally was the Wall of Worry and this leg down has been Aversion. I think that might be true for professional investors. If I am wrong then they are still in the Discouragement zone, after all there are no bases to be had.
But for the individual or average investor, I think they are still to the right of 'Buy the dip'. The reason I say that is because I use the mega cap tech stocks as a proxy for where they stand on the market. Apple (AAPL) only started getting clocked last week. It is coming into some support, but that chart does not look like Discouragement has set in yet. Not to me.
However, I think Alphabet (GOOGL) is much more instructive. Doesn't that period of sideways from May through August look like that sideways action to the right of 'Buy the dip'? And doesn't this recent decline look as if it is heading into Panic? The arrow shows it has just filled that gap.
My mentor in this business always said one third of the stocks will top out before the market (think early 2021 when we had peak everything) and one third will top out with the market (think November) and one third will top out after the high in the market (see Apple and Google which held in the first part of this year).
On the first day of 2022, I showed you this chart of the S&P 500 relative to Nasdaq as a proxy for risk taking and volatility in the market. I have used it several times since. From the Fed pivot in late 2018/early 2019 until early 2021 it was a one way ticket toward risk (when the chart is heading down folks are taking on more risk). Notice the March 2020 Covid Crash looks like a blip on the chart. But that changed in early 2021 (when I believe the bear market actually began).
In early 2022, we crossed that blue line (note most date the bear market's beginnings back to that point). But now - at least for the time being - this ratio peaked in May.
Now let's zoom in on the last year. On the left side you see that November reading (left most red arrow). That was the Nasdaq peak - folks beginning to take off risk. You can see that spike in early March and subsequent decline. That was that fast, sharp March rally. That middle red arrow is the April high in the market as folks unwound their risk.
Then there is the peak in late May as folks took on more risk. In early August, I pointed out that right most arrow and noted I thought it meant we should expect more volatility in late August and September.
Now I'd like you to notice that this ratio is at a lower high. Heck, most of September it has been churning here, unable to move up much more. I think it means we're due for another rally in the market.
We know sentiment is sour. Let me count the ways: Investors Intelligence bulls at 25%, American Association of Individual Investors bears over 60% for two consecutive weeks, the National Association of Active Investment Managers exposure now at 10, the put/call ratios zooming ever higher, the ISE Equity call/put ratio falling under 1.0 for two consecutive days, and even the Citi Panic/Euphoria Model moved into Panic two weeks ago. The Daily Sentiment Index (DSI) for the S&P 500 is back to single digits at 9 and Nasdaq is at 10.
We also know the market is oversold. Last Friday's decline didn't even manage to take the Oscillator to a lower low. We know that Nasdaq's new lows have been contracting with Friday's reading one half of what they were a week ago and one-third of what they were in May.
My view has not changed as I still think we should rally in early October. But if you are looking for the low of the bear market, we'll need bases for that, something that we don't have.