How to put what other investors are doing to your advantage…
The Headlines Are Bearish – But Our Sentiment Tools Tell a Different Story for Stocks
If this week's debt-ceiling storyline proved anything, it's that investors are an emotionally vulnerable bunch.
U.S. stocks were whipsawed early this week as a flurry of bad-news/good-news developments out of Washington had investors feeling bearish one day and bullish the next.
In a year that began with carryover fears of war and inflation – and where we've added bank failures, job losses, and recession fears – Washington's debt-ceiling mess felt like one more downer added to an already dour list of reasons to be fearful about stocks.
So-called "scare headlines" help supercharge this negative sentiment.
Just last week, in fact, after a "survey" of its readers, one national financial publisher headlined a story with warnings of "peak" investor fears.
Here's where you need to be careful.
Decisions based on emotion – and not data – can be downright ruinous when it comes to investing and trading.
Here at TradeSmith, we deal in data – data packaged in a way that helps you make the right decisions... and helps you make money.
Today we're going to show you a very different "take" on market sentiment – a take based on data, not emotion.
And we'll show you a stock to put on your personal watchlist – one that an expert believes you should have on your radar immediately.
The TradeSmith tool I'm talking about is our Fear & Greed indicator.
It identifies how bullish or bearish investors are, to be sure. But it's much more than just a "pulse" of market sentiment; in environments like the one we've just described, it can serve as a contrarian moneymaking tool.
Most folks buy when they're feeling greedy (bullish) and sell when they're feeling fearful (bearish).
Now, knowing how any single investor is feeling at a particular time isn't all that useful. But if you roll all those folks up into one group — into what we know as "the market" — and you understand that sentiment... well, that can be incredibly useful.
But market sentiment doesn't work the way you might assume.
For example, when most individuals are feeling extremely greedy about stocks, you might take that as a positive sign... as confirmation that a bullish stance is the right one.
However, in practice, this actually tends to be a negative or bearish sign for the market.
Why?
Because it suggests that most investors are already betting that stocks will move higher. And if most folks have already bought, it means there are likely not many people left to buy more and push prices even higher.
In other words, extremely greedy sentiment is a warning sign that a rally could be losing steam and a downside reversal is possible.
It works the same way in the other direction too.
When most individuals are feeling extremely fearful about stocks, it tends to be a bullish sign.
It suggests that most investors are expecting more losses. And if most folks have already sold, there likely aren't many left to sell even more and push prices lower.
So extremely fearful sentiment is a sign that a decline could be ending and a new rally is possible.
As you can see, taking advantage of market sentiment isn't complicated. But there are a few finer points you should understand.
Extreme sentiment measures can always become even more extreme before a trend finally reverses. And the timing is always uncertain.
Also, while sentiment can be useful on its own, it works even better when used alongside other tools or indicators.
For example, sentiment can be incredibly powerful when combined with our tools. It can also work well with commonly available indicators like the relative strength index (RSI) or even simple moving averages.
Finally, there are many different types of sentiment tools available for investors, each with its own strengths and weaknesses.
So for most folks, I think it makes great sense to use a "composite" tool that combines several different measures into a single, easy-to-read score.
As mentioned earlier, here at TradeSmith, we have our own proprietary tools and features to create the most powerful sentiment indicator out there that can be found on your TradeSmith Finance dashboard, based on your subscription.
As of this writing, we're seeing the Fear & Greed indicator right in the middle of "Greed" sentiment:
Surprised? Given the tenor of the news, and the prevailing scare headlines, you probably are.
But our tools are data-based, and they can give you a more realistic view of what's happening than you'll ever get by skimming top news stories.
So, what does this "Greed" sentiment tell us to do?
First, remember that you want to exercise extreme care at market extremes, since market extremes are where stocks are potentially overbought or oversold.
Being in "Greed" mode can indicate people are more bullish on stocks, which makes sense ahead of the Federal Reserve potentially pausing rate hikes in June.
If that were to happen, you could see things really start to take off.
Here's a stock to put on your watchlist to potentially grab on a pullback before that happens.
Sentiment Is Down, But the Prospects Are Looking Up
My friend Luke Lango believes the sentiment is extremely negative on SoFi Technologies Inc. (SOFI) stock, but he sees a moneymaking opportunity.
For those who are unaware, SoFi is a personal finance app that's trying to rewrite the rules of consumer banking. Forget physical banking. SoFi's creating a new generation of digitally native banking made for the modern consumer, all through a single "super app." Basically, SoFi is trying to do to Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) what Amazon.com Inc. (AMZN) did to JCPenney and Sears.
SoFi is the bank of the future — the emerging "Amazon of Finance," if you will.
Yet SoFi stock has been absolutely crushed over the past year. And amid a market sell-off, the selling is picking up steam.
SoFi makes a lot of money through student loans. And the COVID-inspired pause in those payments has hurt its business recently. That moratorium was previously set to end on Dec. 31, 2022, with repayments beginning again on Jan. 1, 2023.
But President Biden extended the moratorium again a few months ago.
And now repayments will resume by mid-2023. As a result, SOFI took a nosedive yet again.
While this is an obvious drag for the stock, it still remains a short-term headwind. And it does nothing to change the robust fundamentals underlying this company.
As the old saying goes, it's always darkest before the dawn. And I think it will soon be dawn for SoFi stock. It's possible that by 2030, it'll rise around 24x from current levels.
Luke believes investors who buy and hold enough SoFi stock today could turn into millionaires over the next few years.
That's not hyperbole. That's Luke's honest opinion.
In fact, I recently sat down with Luke in an exclusive interview to get his take on everything that is going on in the market... and most importantly, what the best opportunities out there are.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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