Breakout

Rising market sentiment belies most-hated rally in years

As stocks continue to climb the wall of worry, so is investor sentiment, at least for the bulls. As revealed by Bespoke Investment Group, AAII Bullish Sentiment modestly increased to 39.5% this week, marking the first time it’s climbed above the bull market of average of 38.4% since March 13th.

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Source: Bespoke Investment Group

Source: Bespoke Investment Group

Despite the increase, if you talk to traders most aren’t exactly singing in the streets as neutrality and a sense of unease still pervades the street. “Never in my 18 years of trading have I seen both the bulls and the bears wanting this market to come down,” says Joe Fahmy of Zor Capital in the attached video. “It seems like everyone wants this market to come down… That shift in sentiment is controlling the market a little bit more I’ve noticed recently than in the past.”

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American stock trader Jesse Livermore (1877 - 1940), circa 1935.

American stock trader Jesse Livermore (1877 - 1940), circa 1935.

As Macke astutely points out, legendary trader and author Jesse Livermore was famous for the ‘pain trade’ concept, meaning the market will do whatever hurts the most people. This seems to be what’s happening even now, as either investors miss out on the extended rally, or are getting hammered on the short side.

Fahmy points out that one thing he noticed about sentiment is that it can get “extremely bearish very quickly.” “The pattern can repeat itself again,” he says, “and then there’s all of sudden this 10-15 day grind up because everyone’s so negative… All the sentiment measures really start to get bearish quickly and it ends up supporting the market. It’s been like this for the last two years.”

So what are investors left to do? Fahmy advises being patient with this market. “One thing I’ve noticed in the market is that moves can go on in both directions a lot longer than we expect,” he notes. “The traders that I talk to, the ones that have done the best, are the ones that have traded the least. They’ve actually been patient with positions.”

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