There seems to be an endless debate over sentiment these days. Are folks too bullish? Are they too bearish? The one that I hear most often is that everyone is bearish. Folks cite the unconfirmed American Association of Individual Investors poll and they cite my favorite reasoning that "everyone on Twitter is bearish."
I roll my eyes to both of those.
As I have noted, I discount the extreme bearishness in the AAII poll because it is unconfirmed elsewhere and also because the survey is unscientific. That doesn't mean I will rationalize it and dismiss it, but it doesn't get much weight in my book.
One indicator that does get quite a bit of weight is the Citi Panic/Euphoria Model, which is far from perfect, but has been a good guide over the years. I say it is far from perfect because the timing is not always right in line with the market. Anyone looking for an indicator that has perfect timing every single time I believe will be sorely disappointed. But if you do find one that works 100% of the time, I do hope you will share it with me.
After having tagged Panic in late March, the Citi Model is now touching the underside of Euphoria and that has my interest. Before we get to the current environment let me point out how the indicator's timing is far from perfect. Let's use the year 2018.
In early August 2018 it tagged Euphoria (black down arrow on the S&P chart) but stocks corrected modestly and then rallied another 5% into the high (red arrow). It was nearly two months 'early' but I suppose missing a 5% rally before a 20% decline is not terrible. My mentor in this business used to say if the Market Gods tapped you on the shoulder and told you we were within 5% of the high you'd sell everything.
Now let's look at the McClellan Summation Index from that time. It was already heading down, and at a lower high in early August. As a reminder: it is still rising now. You can see this indicator was well into its decline in September and as the S&P made that fateful high in October it was making lower lows. In other words, the indicators had rolled over by the time the high in the S&P arrived.
That black arrow in December 2018 is when the Citi Model moved t o Panic. Here again, it was a few weeks early as the market plunged for another two weeks. Far from perfect. But a good guide? I'd say yes.
Here's the way I plan to use this indicator now: any sign that the indicators are rolling over, rather than just overbought as they are now, I will move toward more caution in the market.
However this got me thinking, are folks bullish on all stocks or are they bullish, bordering on euphoric on tech stocks? I'd say the latter is more likely. There has been a lot of chatter lately about the Equal Weight S&P and how it is still down nearly 20% from the high. I took a look at it relative to the QQQs, expecting it would be making lower lows and it hasn't. It stopped making lower lows in March.
Should this ratio break under .42, it is likely those indicators of mine will roll right over. So if you are bullish, you should hope this Equal Weight S&P improves from here. I still think we are due a bout of volatility soon.