Wednesday, February 14, 2018

How the market could fool us again

Mid-week market update: I can tell that a stock market downdraft is a correction and not the start of a major bear market when the doomsters crawl out of the woodwork after the market has fallen (see Is the 'short volatility' blowup Bear Stearns or Lehman Brothers?) and analysis from SentimenTrader shows that their smart and dumb money sentiment indicators are at an extreme. As a frame of reference, SentimenTrader defines each term in the following way:
The dumb money indicators are typically made up of retail traders and trend-followers. This is NOT to say that all (or even most) retail mom-and-pop investors, and certainly not most trend-followers, are "dumb". In fact, they are by definition correct during the bulk of a trend.

The smart money indicators are mostly made up of institutional accounts. These traders are often hedging day-to-day moves in the market, and therefore are often trading against the prevailing trend. Again, it is only when these traders move to an extreme that a market is most likely to reverse in their direction.

Sure, this could be the start of a bear market, but bear markets usually begin with technical deterioration, which are not present today.

The full post can be found at our new site here.

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