Sentiment In An Elevated Market
With the weekend nearly over and any research or reading completed, most investors now know the Dow Jones Industrial Average has been on a rare eleven day winning streak. What makes this more amazing is this is occurring as the market hits new highs with each close. One conclusion drawn from this seems to be the market is nearing a correction or consolidation point and I will be the first to admit, a pullback in the market would certainly be healthy. Since the U.S. election on November 8, the S&P 500 Index is up 10.6%, a return investors would find acceptable for an entire year. The strong and sustained market advance has led to a number of technical and sentiment readings approaching what seems to be elevated levels.
First, below is a chart of the S&P 500 Index along with its 200-day moving average. The chart shows the S&P 500 Index is trading above its 200-day moving average be an amount reflective of an overbought market.
Another sentiment measure I have written about in the past is the National Association of Active Investment Managers Exposure Index. The EI has been at a very high level since shortly after the election. if one believes in the contrarian nature of these sentiment measures, this high level of bullishness can actually be viewed as a bearish market signal.
Carl Swenlin, a contributing author at StockCharts.com, featured the above chart in a recent article, Sentiment: Investment Managers Very Bullish. He notes in the article that high EI readings are not necessarily an immediate omen for the market.
"One of the things I wanted to point out is the fact that very high EI readings (blue up arrows) do not always signify a point of buying exhaustion that results in price correction. For example, the EI spike in early-2013 signaled a price advance that lasted almost two years. Also, in 2014 and 2015 the dotted lines show how, after initially high EI readings, exposure declined over several months before the price advances finally broke."