Again the bottom callers are out in force. Their argument is that traders are now sufficiently bearish that a bounce must be imminent. Data does back up the argument that when the hoi polloi becomes overly bearish a turn is near, however we would like to see a study that compares the accuracy of sentiment readings between trending markets and ranging markets.
Take the stochastics indicator for example. In a ranging market overbought and oversold readings for this indicator produce fairly accurate turning points and this is a useful tool under the correct conditions. When the market is trending however overbought or oversold readings take on a different meaning and the tool becomes less useful. For example, if the market is trending lower oversold stochastics are poor indicators of turning points whereas overbought stochastics still produce fairly accurate sell signals. We suspect that market sentiment is something like that. When the market is trending lower of course fear is produced. When is fear great enough to produce a turning point? We don’t know. Since oversold conditions can often continue much longer than seems reasonable fear can probably grow to fairly significant levels before it becomes sufficiently great enough to mark a turning point. Are we there yet? If the QQQQ and SPY follow through from yesterday’s selling to take out the April 20 lows we would say no, we are not yet at a turning point. Will taking out these lows produce more fear? You bet.
Posted by srsfinance
at 3:52 AM EDT
