Sentiment indicators measure trader/investor belief in market/ stock direction. They are generally viewed as contrary indicators. Extreme high bullish sentiment relates to tops, extreme low bullish sentiment with bottoms.
Polling market participants is one way to measure sentiment.
Market Vane Corporation – Bullish Consensus measures futures market sentiment by following the trading recommendations of leading Commodity Trading Advisors.
The weekly Bullish Consensus reading for the S&P 500 – 06/17/24 to 06/21/24 was the highest since January 2018.
The weekly S&P 500 (SPX) chart courtesy of Trading View illustrates Market Vane readings.
Market Vane readings range from 1 to 100. For the SPX, readings over 65 generally indicate major peaks. Readings below 35 are usually near major bottoms.
The highest SPX – Market Vane reading within the prior seven years was 72. This occurred in the week ending 01/26/18 just prior to a two week 11% – SPX – mini crash.
The Market Vane reading last week was 71. Sometimes major turns could occur with a sentiment divergence. Note the January 2022 divergence. The SPX ultimate peak had a reading of 67 vs. the November 2021 reading of 68.
In the next few weeks its possible the SPX could continue to rally and have a lower Market Vane reading.
The daily SPX chart shows its relationship with the VIX.
The CBOE Volatility Index (VIX) is another way to measure SPX sentiment. VIX upward spikes usually correspond to SPX bottoms. VIX behaves differently at SPX tops. VIX making extreme lows are bullish for the SPX. On 05/23/24 the VIX made a new low which corresponded to an SPX short-term peak. After a brief decline SPX continued to new highs.
Please note that the SPX all-time high on 06/20/24 corresponded with a higher VIX bottom. This is a sentiment divergence – bearish for the SPX.
Sentiment indicators are usually not precise and need to be used in conjunction with indicators from the momentum and price dimensions.
The 06/12/24 blog “The Incredible Shrinking U.S. Stock Market” illustrated the extreme bearish momentum divergence of the Nasdaq Composite – 52 – week highs. Since then, this divergences has gotten even more extreme!
From the price dimension the SPX on 06/20/24 was only slightly above the rising trendline connecting the July 2023 and March 2024 peaks.
Additionally, on 06/20/24 both the Nasdaq Composite and Nvidia Corporation stock had Key Reversals.
The time dimension could also be a factor. The evidence from the sentiment, momentum, and price dimensions culminated on June 20, 2024 – the Summer Solstice.
Perhaps the change of seasons from Spring to Summer could also be a change of season for U.S. stocks – from bullish to bearish.
Four Dimension Trading 