Frothy tech sentiment, reversal day

Froth tech sentiment

Sentiment in the technology sector is frothy and there’s still some ways to go before such excessive optimism is reversed. The NASDAQ Composite’s Daily Sentiment Index is extremely elevated. Over the past few years, this was a decent sell signal for tech stocks (although the most recent signal in July 2020 was 1.5 months early).

Looking at all the historical data from 2000-present, this was a minor short term bearish sign for the NASDAQ:

Reversal day

What a wild day. The S&P 500 fell sharply from an all-time high while some stocks were wildly short squeezed. These sudden stock market reversals usually led to choppy trading over the next 2 weeks:

Conclusion

  1. Short term trend followers should continue to ride the bull trend because no one knows exactly when it will end.
  2. Medium term traders should go neither long nor short.
  3. Long term investors should be highly defensive right now. This speculative bull market may last another 6 months or even 9 months, but in 2 years time, long term investors will be glad they did not buy today.

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