(This is an excerpt from Wednesday's blog for Decision Point subscribers.)
Sentiment readings were very bullish across a range of indicators this week. To begin, Investors Intelligence Advisor Sentiment had its highest percentage of bulls (58.8) since the October 2007 market top.
The American Association of Individual Investors poll had the highest percentage of bulls (63) since October 2004, and the lowest percentage of bears (16) since October 2005.
Finally, the National Association of Active Investment Managers (NAAIM) shows that on average they are 81.83% invested. This is in the high end of the range and shows that these managers are quite bullish.
While high levels of bullish sentiment among advisors, investors, and money managers usually occur at market tops, market tops do not always occur when sentiment is very bullish. Sometimes people respond to the obvious and correctly align their market posture with the price trend. In situations like this we have to wonder whether or not they are wrong.
Bottom Line: An excess of bullish sentiment is a caution sign and should cause concern because such sentiment peaks are often followed by price corrections, if not bull market tops; however, we do not use sentiment as a timing tool, just a indicator to help paint a picture of the market environment. So far we have no indication from our trend-following models that there are major problems ahead.
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Technical analysis is a windsock, not a crystal ball.
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Decision Point's Timer Digest Rankings
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BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
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Copyright 2010 Decision Point. Nothing herein should be construed as an offer or solicitation to buy or sell any security. Past performance does not indicate future results.
