Sentiment: A Meaningful Shift For Stock Bulls?

By: Chris Ciovacco | Thu, Jul 17, 2014
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Hot Off The Press

On July 16, in a review of investor sentiment, we noted the importance of keeping an eye on this week's American Association of Individual Investors (AAII) Sentiment Survey. Last week's decline in the S&P 500 and this week's concern over a 2015 rate increase by the Federal Reserve, has resulted in a rational decrease in bullish sentiment and an increase in bearish sentiment. The image below is a screen shot from AAII's website:

AAII Sentiment Survey


Sentiment Is Not At Extreme Levels

If you are new to sentiment, the basic theory is as follows...if we see excessive bullishness, it means most investors are probably close to fully invested. Conversely, if we see excessive bearishness, then most people have probably sold already. If everyone has bought, then buying power becomes weak. If everyone has sold, then selling pressure drops. Thus, theoretically, sentiment can be helpful when it reaches extreme levels since the probability of a market reversal is higher.

Bullish sentiment is currently below average (32.4% vs. 39.0%). Similarly, bearish sentiment is hovering around average, not extreme levels. Therefore, in theory, sentiment is not particularly helpful at the present time. Sentiment is certainly not at extreme levels that would suggest an imminent major peak in stocks. A correction is the more likely outcome if markets become weak.


Investment Implications - Wait For Evidence To Turn

The following tweet contains arguably the most important concept in investing and risk management:

Ciovacco Tweet

The concept above applies to the present day market. Does the tweet contain useful information? We think so and others have agreed by voting our firm "most helpful" on Twitter. In terms of how to deal with recent volatility in the stock market, note in the tweet is says nothing about forecasting. Over the next few weeks, if we pay attention meticulously and make adjustments as needed, our allocation between stocks (SPY) and conservative assets, such as bonds (TLT) will stay prudently aligned with the stock market's upside potential relative to the downside risks.

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

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