Market sentiment is hard to gauge, because it is constantly changing. In turn, this can make it exceedingly difficult to feel confident in your trading strategy.
When fear gripped investors and traders during October and December 2018, most were too stunned to do anything other than sell. It didn’t matter if you were holding high-quality names like Home Depot, Goldman Sachs or Apple. These stocks – along with many others – were thrown out like a baby with the bathwater.
Yes, there were rallies during those two months, but let’s remember that many traders don’t trust the first few rally attempts. If you bought the first couple of dips only to have the market slam down again, you won’t try that again. That helped fuel poor sentiment.
Market sentiment indicators continued dropping and eventually reached historically bearish levels, because no one knew when the markets would hit rock bottom. Looking back, we hit bottom on Christmas Eve when the markets plunged to levels not seen since May 2017. Since hitting that low, markets have been on a mission, surging higher and increasing investor confidence along the way.
The amazing rally over the past month has virtually erased all of the bearishness. The VIX is down 55% from the high on December 24, breadth has improved and put/call ratios are heading downward. Further, the stochastics of the indices are embedded, which tells us dips will continue to be bought.
With that said, the markets are up 6% or more so far this month, a pace that cannot be maintained. However, for the bulls, the shift to a stock picker’s market is a saving grace.
Let’s hope the positive upward trend continues. Just like you, I am tired of the markets bouncing all over the place. Perhaps stocks are ready to stand on their own rather than get beaten to a pulp when the markets wobble.