When everyone is bearish: Think opportunity
I am not a huge fan of technical indicators, but certain metrics are certainly useful in seeing where we are on the continuum of sentiment. When extreme levels of optimism or pessimism are reached, it becomes much more likely to see a reversal rather than a move further away from normalcy.
Helene Meisler published a nice chart this morning illustrating how far the average stock in the Nasdaq composite has dropped. The number of new yearly highs divided by new yearly lows on that index now sits at the third lowest point since the start of 2012.
As of May 9, 2014 new Nasdaq highs were registering less than 30% of new 52-week lows. The most recent two times that happened previously led to multi-month rallies. The early February 2014, dip to a reading close to 50% saw a nice shorter term surge. Negative sentiment was not nearly as pervasive back then as it is today.
Ms. Meisler also noted that overall investment blogger sentiment had turned the most negative since 2013. That is a good contrary indicator which confirms the Nasdaq highs and lows signal.
The AAIA (American Association of Individual Investors) bullish sentiment and bearish sentiment readings last week showed more bears than bulls, a rare occurance.
Don’t buy simply because of these indicators.
If, however, you’ve been thinking of getting into a stock that’s been crushed, it may be time to buy before the mood changes. Rebounds tend to come without warning and those low prices, which you might have been hoping would decline even further, are often fleeting.
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