There is nothing static about market analysis whether on a macro or micro level. What works one day can be turned on its head the next. What is brilliant one moment can ruin you the next. Good becomes great when being able to completely disregard what has worked nearly perfectly in the past because it simply doesn't apply to the present.
Sentiment indicators are notorious for their failings at important junctures in a market cycle. They can also be worth their weight in gold when utilized properly at select points.
Here is a chart of AAII sentiment as it currently stands:
Bearish sentiment as it stands presently is close to the lows of December. It's not just this indicator that is suggesting an abundance of pessimism. It's all over the place. Investors have, once again, evacuated the market as if it has contracted the Ebola virus with a deadly investor pandemic on the imminent horizon.
Given the shallow nature of the May correction and the ferocity with which the market recently bottomed, the bearish sentiment in the markets acts as a safety net on the downside for the month of June. This will allow the markets to move forward, as they have been doing in recent days, without much in the way of downside volatility.
The only way the upside momentum can be broken is in case of a fundamental negative event that breaks the deception mechanism of the market. That fundamental negative event will not be trade war related as the market has already acclimated to this fundamental negative, with a majority of investors ready to react with an instant flip to the bearish side on any negative headline. Witness the failure of the Mexico talks after the market closed yesterday as one recent example. Today we are up. Negative trade news is no longer a viable fundamental hook.
The continuing "bearing up" of the investment community in the face of what has been a standard correction within a bull market is the perfect recipe for continued strength or at the very least, no more weakness over the short-term.
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