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My mentor, Sir John Templeton came up with the 4 stages of a bull market, reflected in the chart above. My strategy- TB&M (Tops, Bottoms & No Middles) focuses on key turning points at key highs and lows.
With this in mind are investors reaching the Euphoric stage as the S&P 500 is nearing old highs and the Dow is hitting new all-time highs? The chart below was sent to Premium & Sector Sentiment extreme members last week.
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This chart created by Sentiment Trader.com reflects that overall sentiment indicators are not at levels where prior key highs have taken place over the past couple of years. I have shared this with members for several weeks, suggesting that odds favor higher prices until sentiment reaches higher euphoric levels!
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the guy from http://sentiment-trader.blogspot.com who is very accurate with his market calls, gave some breadth charts the bulls might want to take a look at. I agree with that pic above almost every man and and his dog, and the boy on the corner shining your shoes is thinking about buying this market. When you hear things like that, you know its time to get out of the road and its time for a correction.
Before I even read the comments below, I was thinking the exact same thing that belsha posted. At least on this chart it appears that AFTER excessive optimism, the market tends to keep rising in divergence with sentiment. Also the chart is market with a shaded red vertical bar (the last one on the right) where excessive optimism wasn’t actually reached. I understand that’s an interim peak, but it’s still inconsistent with how the rest of the chart was done. This really could be bearish divergence: The market is higher than before, yet optimism is lower and declining. Perhaps that’s suggesting fear.
Belsha…As always, great observations and thoughts. A take- the recent high in sentiment didn’t reach the other peaks. There are also other sentiment gauges that I didn’t include, just sharing with members at this time, that aren’t near as high as they were at last falls market highs. Is sentiment near where market bottoms take place? you pegged that one!
Chris
I am somewhat confused by this chart and the interpretation that you and many others seem to make of it. While it is true that market bottoms always coincide with sentiment lows, it is clearly visible from the chart that the euphoric sentiment highs happen about 2/3ds into a rallye, and already have dipped quiet a bit when the market high occurs. For exemple, sentiment reached its high in December 2010, when markets would still rallye a good deal more for 4 months, and when the SP500 reached its top in may 2011, sentiment was already a good deal lower ! Same thing in the winter of 2012. So one could argue that sentiment making lower highs while markets make higher highs could be a good bearish divergence indicator. I am not saying this is happening now, but he chart could suggest it.