In mid May, I was discussing here and on the radio that there was too much confidence as the market was going up. This is typically a good thing in a good market. But, in a bad market, temporary overconfidence should be sold. My Crazy Investor Indicator reached maximum optimism in mid May. Coincidentally, that was the exact time the stock market made a high. The S&P 500 closed at 1426 on May 19th (It’s now at 1359, a 5% correction so far). You can see from my updated Crazy Investor Indicator that we are now seeing the fear pick up but we’re still not near where we were in March or January for that matter. So, it’s highly likely we go and at least test the old lows of March.
Fig. 1
Remember that after a nasty day like Friday, rallies are common for a week or so. We got a 70 point rally in the Dow yesterday but the Nasdaq lagged behind as it is today as well even though most of the volume was down voluem. Continue to watch the trend. And the current trend is down. This market isn’t going to go up or down in a straight line. Don’t get confused by the daily moves. Looking at the picture above, when fear spikes, you cover your shorts and make some long purchases and when investors get overconfident, you short more and put tight stops on your positions. We’re now heading back to the fear zone, but we’re not all the way there yet.
One other note. You can see by the picture that we don’t always get to the extreme. We could start heading the other direction and investors could become confident over the next few weeks. The key is to make your big moves when we are at those extremes.
Don’t forget to post your comments. I like getting feedback on not only this post but others.
