Here's what a firm understanding of market sentiment can tell you about stocks.
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00:00 Of course, Wall Street has become increasingly bullish.
00:02 The media loves to wrap market sentiment, Helene,
00:04 with neat bull versus bear back and forth.
00:07 But in practice, it should be treated a lot more seriously
00:10 than just some flashy, quick, shiny thing headline.
00:14 Helene, why do you keep track of sentiment
00:15 and how does that influence your own personal approach
00:18 to the market?
00:19 - Okay, first of all, we keep track of it
00:23 because we wanna know when, if you will, think of a boat.
00:27 When a boat is loaded too far on one side,
00:29 it has a tendency to flip back,
00:31 either flip over or flip back to the other side.
00:35 And so we don't want sentiment to get too,
00:39 well, when we were in late October,
00:43 we got sentiment too bearish.
00:45 And then you see that people have to scramble
00:47 and shorts have to cover and nobody wants to own stocks.
00:50 And then all of a sudden, everybody wants to own stocks
00:52 because the stocks are going up.
00:54 And so sentiment slowly starts to move towards bullishness.
00:59 And now we're getting to the point where bullishness,
01:02 I don't think we're quite giddy,
01:03 but we're on the verge of getting, if you will,
01:06 the boat tipping a little too far to one side.
01:10 And the reason we care about it
01:12 is the same reason we cared when people got too bearish
01:15 is that when they get too bullish,
01:17 if everybody owns stocks, who's gonna be left to buy?
01:20 So you need to sort of shake it out
01:22 and get people a little bearish.
01:24 So they think, "Oh God,
01:26 "maybe I don't need to own stocks here."
01:28 And then you can go up again.
01:29 So it's the same concept as an overbought market
01:32 that got a little ahead of itself.
01:34 - I love that.
01:37 Now, Helene, you've seen numerous signs
01:38 of more investors warming up to the market.
01:41 Can you walk us through some of the indicators
01:43 that you've been closely watching
01:44 as well as their significance?
01:46 - Yeah, first of all,
01:49 the investors intelligence bulls
01:53 have gotten to 55% this week.
01:56 To give you an idea, generally speaking, 55 to 60%,
02:00 you're sort of on the verge of getting this.
02:03 You've really converted a lot of people to bullishness.
02:08 We got to 56% the first week in August,
02:11 and then you saw we had a big correction.
02:13 So that'll give you an idea.
02:16 When we look at the American Association
02:20 of Individual Investors, which is,
02:24 to me, I think it's a little bit more like day traders,
02:27 but they're now at 48% bulls.
02:30 They got to 51% in August.
02:33 So you can see, and they were down,
02:35 I can't quite remember,
02:36 but I think they were down at like 30%,
02:39 or maybe it was 25% in late August.
02:42 So they're getting a little frothy.
02:44 And then if we think about the bears,
02:47 the bears in the AAII poll are now at 19.6.
02:53 And that is the first time that they've been teenagers
02:56 since 2021.
02:59 That's a long time.
03:01 And so maybe they're not as bullish as they were in August,
03:05 but they're certainly a lot less bearish.
03:07 And if you take a look at this chart here,
03:10 I like to plot it on a four-week moving average,
03:13 because it gives you a little bit more of a trend.
03:16 And the first thing is you can see that big peak
03:19 in the four-week moving average.
03:20 That's the blue line right at the low.
03:22 People were way too bearish.
03:24 And now you can see we're fast approaching
03:27 the kind of readings that we had again in early August.
03:31 But even if you go back and you take a look
03:33 at those twin lows in 2021,
03:37 and I know people are gonna say,
03:38 "Yeah, but look, the market kept going up."
03:41 Except if you take a walk down memory lane to 2021,
03:46 you might recall the second half of the year
03:50 was all what we called FAANG stocks.
03:52 Now we call them the Magnificent Seven,
03:54 but it was a terrible year for any other stock
03:57 in the second half.
03:59 And then in November, even the FAANG stocks peaked out.
04:02 So you care about sentiment because again,
04:08 you don't want the boat to capsize.
04:10 You want it to sort of right itself again.
04:13 - Helene, if I could ask you a quick follow-up on this.
04:16 To this point of AAII, you wrote this week
04:19 that folks have finally gotten in the pool.
04:23 Why do you think they are in the pool
04:24 and how long do you suspect they will stay there for?
04:27 - Okay, so I always refer to sentiment
04:31 as either everybody's in the pool
04:33 or everybody's out of the pool.
04:35 And so if you think about a pool
04:38 that goes from shallow to deep,
04:41 the way I see it is people sort of,
04:46 as the market rallies, they take a step,
04:49 they stand on the first step,
04:50 they get adjusted to the water,
04:52 then they take another step in and so forth and so on.
04:56 And now the way I see it is
04:58 they're sort of in the shallow end.
05:00 They haven't really taken a big deep dive into the deep end
05:05 and that's the next step.
05:06 Now, if you get a pullback,
05:08 what you do is you get everybody scurrying back to the steps
05:12 which is to me, foolish.
05:14 You don't want everybody diving straight into the deep end.
05:18 - Alina, I gotta say between boats and pools,
05:20 you do a wonderful job of just describing the imagery.
05:24 I mean this sincerely because I think for people
05:26 that kind of approach these topics
05:28 and they think, ah, it's a bit ambiguous, a little esoteric,
05:31 it really does paint a really wonderful picture
05:33 in terms of what you're trying to describe.
05:35 So I gotta say, I really appreciate that.
05:37 (silence)
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