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Ignore Extreme Opinions

The S&P 500 is up nearly 17% from the lows of Christmas Eve 2018…did you panic and sell at the wrong time?  If so, maybe you should be paying more attention to investor sentiment…as a contrarian indicator.

Last month I discussed Investor Sentiment in a podcast:  https://www.wealthsteading.com/279  

The key to understanding investor sentiment, is that usually extreme opinions are poor indicators of reality.  This causes the average investor to make bad decisions, because the media narrative focuses on the dramatic, rather than the rational.

The attached chart is derived from the AAII’s weekly sentiment survey.  The trick to interpreting this data is to ignore the extremes (Bullish & Bearish) and concentrate on the “neutral” position.  Note how well the “Neutral” sentiment correlates to the direction of the S&P 500.  Also, pay attention to the historic neutral average.  Non-coincidentally, you’ll often find it hovers near the market’s fair value.

If you’ve been confounded by the market’s seemingly irrational behavior, I’d encourage you to watch these two videos.  Even if you’ve already viewed them, they’re worth re-watching in light of the market’s performance over the past weeks.

S&P 500 Analysis

Contrarian View RETEST?

As always, invest with caution.


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