Study: a sudden decline in sentiment is bullish for stocks


The stock market soared from 2017 to January 2018. The rally’s acceleration in January resulted in extremely optimistic sentiment from consumers.

  1. 30% of consumers polled in January by the Conference Board expected stocks to rise in the next few months.
  2. Today, only 6% of consumers polled by the Conference Board expect stocks to rise in the next few months.

This is a drastic reversal in stock market sentiment. It is a medium term bullish sign outside of a recession. The U.S. economy is nowhere near a recession today. Recessionary cases don’t apply to today.
Here are the historical cases in which the Conference Board Consumers’ Net Expectation of a Rising Stock Market fell by more than 20% in 2 months.

  1. March 30, 2018 (present case)
  2. June 29, 2012
  3. March 31, 2008
  4. February 29, 2008
  5. March 30, 2007
  6. March 31, 2003
  7. July 31, 2002
  8. September 30, 1998
  9. April 30, 1997
  10. September 28, 1990
  11. August 31, 1990

Let’s look at what the S&P 500 did next.

June 29, 2012

This occurred after the S&P’s “small correction” bottomed in early June. The S&P went up over the next 2.5 months before making another “small correction”.

March 31, 2008

This was a bear market + recession case. It doesn’t apply to today because the Medium-Long Term Model predicts neither a bear market nor a recession.
Nevertheless, the S&P still went up over the next 1.5 months after this signal came out.

February 29, 2008

This was a bear market + recession case. It doesn’t apply to today because the Medium-Long Term Model predicts neither a bear market nor a recession.
Nevertheless, the S&P still went up over the next 2.5 months after this signal came out.

March 30, 2007

This occurred after the S&P bottomed from a “small correction” in March. The S&P rallied another 3.5 months before the next “small correction”.

March 31, 2003

This occurred after the S&P’s final bottom of its 2000-2002 bear market (a triple bottom). The S&P soared over the next year.
This historically case does not apply to today because it occurred AFTER a 50%+ bear market. The S&P has not fallen 50%+ today.

July 31, 2002

This occurred after the S&P bottomed in July. The S&P chopped higher over the next 3 weeks.
This historically case does not apply to today because it occurred AFTER a 50%+ bear market. The S&P has not fallen 50%+ today.

September 30, 1998

This occurred while the S&P was making a retest of its September bottom. The S&P soared over the next half year.

April 30, 1997

The S&P soared over the next 5 months before it began a “small correction” in October 1997.

September 28, 1990 & August 31, 1990

The S&P fell 1 more month after August 31, but that was the bottom of the “significant correction”. The S&P soared over the next half year.

Conclusion

This is a short-medium term bullish sign for the stock market. The stock market might fall a little more in the short term, but the downside is limited.
The stock market will trend higher over the next few months (short-medium term), regardless of how volatility the uptrend is.

1 comment add yours

  1. Troy,
    1)- heard on Bloomberg radio a notable fund manager say, when the generals are down, it’s usually an indication of a bottom. He was referencing Facebook; amazon etc
    2). Re. 200dma post. Since it’s all over all the financial news media headlines “that everyone is looking for a close or trade below it” most likely it won’t happen. It’s a 50/50 chance. Or it will happen in a gut wrenching way. Rally to 2740. Then the bots take it below 200dma. That’s how the pension/institutional funds make there swings; by gut wrenching sentiment shifts leaving the majority of small retail accounts in shock and awe. “How did this possibly happen effect”. I have to respectfully say it’s 50/50 and this reminds me of the post U made the weekend going into the nfp non farm payrolls report last month, where that Friday was a relentless trending rally from 2730 to 2800. U stated “ expect more upside follow through”. 200 handles later that post marked a short term top at 2800. I will never forget that post.
    3). The market will do what the majority least expect. The gut wrenching move leaving new traders in shock and awe moment, then revenge trading that leads to there blown out account. It’s no different how the % of extreme wealth is made by the 1% from the 99% of middle to lows income workers. (Walmart/ amazon). Just like the big pension/institution gut wrenching sentiment shift extremes taking huge sums of money from the small trading accounts. As we will see starting this week running into Memorial Day with the occasional 1-3 Day gut wrenching sentiment shift extremes then run it up again . It’s just like how the shark comes up out of no where into the school of thousands of minnows to snack on.
    God bless all

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