| 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 and 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. (To learn more about accessing this tool, watch my presentation with Marc and Alex HERE.) As of this writing, we're seeing the Fear & Greed indicator right in the middle of the "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. Enjoy your day, Keith | 
Post a Comment
Post a Comment