A through analysis of any market requires the examination of all four market dimensions, price, time, sentiment and momentum. The weight of evidence could help determine a markets probable course. Each dimension has various factors to be weighed. This blog focus is on the sentiment dimension.
The daily S&P 500 (SPX) chart courtesy of Trading View illustrates sentiment readings from Market Vane Inc.
This chart updates data illustrated in the 09/07/22 blog ”Excessive Bearish Sentiment”
The Market Vane Corporation polls Futures traders from various markets. The polling data derives a Bullish Consensus reading. High percentage reading come near market tops, low readings near bottoms. Divergent readings can also signal potential turns.
The reading near the crash bottom in March 2020 was 28%. In November 2021 the reading was 68%.
The most recent reading has risen slightly yet is still relatively very low and diverging off of the reading just before the SPX 06/17/22 bottom. Normally a higher market bottom should correspond with a higher Market Vane reading. The best use of the Bullish Consensus is as a contrary indicator. The divergence implies excessive bearishness and could be prelude to a large rally.
The next chart compares the SPX with the Volatility Index (VIX).
VIX spikes are effective in identifying intermediate and short – term degree SPX bottoms. Occasionally there can be divergent signals such as in May and June of 2022.
Note however, that the current VIX reading is not near the high levels associated with SPX bottoms. This implies the VIX could be in the process of trending higher with corresponding lower SPX prices.
The next chart compares the SPX with the Put/Call ratio (PC).
“Investor’s Business Daily” uses PC readings above 1.15 as an indication of a potential stock market bottom. Prior to 09/16/22 there have been five readings that were close to or at short-term SPX bottoms. Also note the PC can sometimes have divergent readings. Its also possible to discover short-term bottoms with PC readings below 1.15. Note the lavender down arrows .
The PC reading on 09/16/22 was the highest in over a year reaching 1.398 just before the SPX bottom on 09/16/22. This is another sign of excessive bearishness. You don’t want to be in a crowed trade. Currently for US stocks, the crowd is on the bear side.
This is the evidence from the sentiment indicators.
Market Vane reading – excessively bearish, contrarily bullish.
Put/Call ratio reading – excessively bearish , contrarily bullish.
VIX could trend higher, contrarily bearish.
The weight of evidence is bullish.
The next blog will review momentum indicators.
Four Dimension Trading 