Trade Signals: The market remains range-bound. Sentiment has improved, meaning investor sentiment is nearing the extreme pessimism zone. This tends to be short-term bullish for the markets. However, equity valuations remain high and thus risk is high. The Zweig Bond Model remains bullish on bonds. High yield remains in a sell signal — there is modest price improvement from the recent lows.
Long ago, famed investor Sir John Templeton said to me, “The secret of my success is that I buy when everyone is selling and I sell when everyone else is buying.” Back then, there were few sources available that measured and reported investor sentiment. Now there are many. My favorite is NDR’s Crowd Sentiment Poll. It updates weekly and is slower moving than the Daily Trading Sentiment Composite (below). I use the information to measure if pessimism is extreme or if optimism is extreme. It helps with the hedging we do with the put options in one of our equity strategies. For example, if optimism is extremely high (which is bearish for equities) and other indicators are suggesting high market risk, we may put hedges in place to protect some of the downside. If the market then declines and moves into a reading of extreme pessimism, we may reduce or remove the hedges and look to reset them when the market rallies back to extreme optimism.
You can see how the market performed when optimism was extreme (poor performance) and when pessimism was extreme (good performance). We try to stay in line with this as best we can with our hedging.
By Steve Blumenthal | See the full story in Trade Signals: Investor Pessimism, Momentum and Trend
The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change. They do not represent the opinions of CMG. CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts. Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.