Sentiment indicators are clearly showing that investors and traders are sporting some sweat on their brows. Bullish traders are probably in good shape but should have one hand on the exit door. Bearish traders (or anyone who just stumbled into the party) are way behind the markets and probably looking to make up ground quickly.
I don’t recommend rushing into trades – that’s a sure way to make mistakes – but I do advocate for caution. As I’ve written recently, there’s plenty of uncertainty ahead of the election, and traders remain a bit wary after the smashing the markets took in March.
Sure, the Fed has created an environment that is friendly to equity traders and investors, but who wants to get burned twice in one year?
What sentiment is telling us
Sentiment indicators tell us how traders and investors feel about market conditions. Right now, it’s showing more apathy than enthusiasm. How do we know this?
First of all, volatility remains elevated. This appears to be due to worries about chaos after the presidential election.
Investor surveys, insider buys/sells, put/call ratios and breadth indicators all signal that traders and investors are not excited about putting money in the markets. This may seem odd, but it’s certainly understandable. With markets at/near all time highs and the economy not yet able to walk on its own, there is plenty of angst about investing.
When the markets were swooning it seemed more reasonable to dip a toe in the water. But no one is feeling that confident now.
A wall of worry is up
As we have talked about in the past, markets tend to go against the crowd when the wall of worry is up (as it seems to be right now). This means that when traders are nervous, markets tend to rise against it.
So, what’s a trader to do? Markets are higher as we head into the heaviest part of earnings season before the holidays. Pay attention to the price action over sentiment (and definitely turn down the market noise). It’ll put you on the right side of history.