As all investors and traders are aware, investor sentiment is a ‘contrary’ indicator, always at high levels of bullishness and complacency at rally and market tops, and at extreme levels of bearishness and fear at market bottoms.
Sentiment cannot be used to time the market as it can remain at extreme levels for quite some time. But when it reaches extremes it does serve as a warning to keep a eye on other conditions and signals.
The results of the weekly poll of its members by the American Association of Individual Investors (AAII) were released last night, and showed bullishness at 49.6%, bearishness at 25.2%, for a spread of 24.4. It reached 50.9% bullish a month ago. So it remains in its warning zone around 50% bullish. It reached only 48.5% bullish, 29.7% bearish at the April top this year.
The VIX Index (aka the Fear Index) is also showing a low level of fear (high level of bullishness and complacency), bouncing around 20, in the area associated with rally tops since the last bull market ended in 2007, as marked by the vertical red lines in the chart.
And the October 12 Investors Intelligence Sentiment poll showed 47.2% bulls, only 22.5% bears.
So, it might be wise to at least be aware of the sentiment situation at this point, particularly with the Dow’s internal strength, as measured by its Relative Strength Index, in negative divergence with the Dow’s last high (its RSI made lower highs). That was also the situation at the tops of the previous rallies of this year, as marked by the short-red lines on the chart.
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