Bearish Sentiment Not Always a Bottom Picker

Bearish Sentiment Not Always a Bottom Picker

By Carl Swenlin

The National Association of Active Investment Managers (www.naaim.org) takes a weekly poll of its members that results in a pretty good sentiment poll. Approximately 40 NAAIM member firms who are active money managers are asked each week to provide a number which represents their overall equity exposure at the market close on Wednesday. Responses can vary from 200% leveraged long to 200% leveraged short. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers, as a group.

This week NAAIM Sentlment dropped below zero, something that hasn’t happened since October 2008. While bearish extremes in sentiment can identify important price lows, the instance of the October 2008 negative sentiment reading did not, so I think it would be premature to anticipate an important price low based upon the current negative sentiment reading.

investor sentiment and stock prices graph

Click to enlarge.

I was also looking for a price pattern similar to what we have had in the last few months — a rounded consolidation ending in a breakdown and key reversal pattern. It is a bar that breaks down from the consolidtaion, but then reverses up and closes back inside the consolidation. Just like this week so far. I found a very similar pattern in the third quarter of 2008 (marked by the arrow). As you can see by the price decline that followed, it was not a key reversal after all.

Bottom Line: We are in a bear market, and bearish sentiment indicators are not automatically indications that a major price low has been made. In fact, extreme sentiment readings can appear months ahead of an actual price top or bottom.

As for the similar key reversal patterns, the purpose is to illustrate how tricky bear markets can be, but we can’t assume that the current pattern will resolve the same way as the one in 2008. Nevertheless, current price action is occuring within a context similar to that of 2008, so bullish assumptions would be premature.

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Technical analysis is a windsock, not a crystal ball.

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Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in market timing, stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.

About Author

Brett

Hi, I’m Brett Owens – and I’m a financial junkie. My “problem” started incollege, when I got a little dose of the stock market – man, was I hooked…in no time, I was reading the Wall Street Journal religously.

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