On July 17th, the stock market experienced a notable shift in investor sentiment. More than half the investors began being being bullish, a significant change from earlier in 2024. This article explores what this shift means, the implications for traders, and whether the recent correction is just the beginning.
A Significant Shift in Investor Sentiment
Investor sentiment is a critical indicator of market trends. On July 17th, a record 53% of investors turned bullish on the stock market. This is a stark contrast to the sentiment in April when only 30% of investors were optimistic. Such a dramatic shift is rare and has only been seen a handful of times in the past decade, indicating a strong wave of optimism among investors.
This bullish sentiment occurred at the peak of a stock market rally. Since July 17th, the S&P 500 has declined by over 3%. This drop raises questions about whether this bullish sentiment was a sign of an overextended market.
Trading Strategies: Buy Low, Sell High
As a trader, it’s essential to adjust your exposure based on market conditions. Increasing exposure during corrections, like in April when sentiment was bearish, and reducing exposure during overextended periods is crucial. The “buy low, sell high” strategy is a timeless approach to managing risk and capitalizing on market movements.
Throughout 2024, we applied this strategy effectively. We added a significant number of equity trades during April’s correction and booked profits on many of them in June and July. This approach underscores the importance of adjusting exposure based on market sentiment and conditions.
Is This the End of the Correction?
The critical question now is whether the recent drop is the extent of the market correction or just the beginning. Historically, even during multi-year bull markets, the stock market experiences multiple 10% corrections. For instance, between 1990 and 1999, there were six such corrections, and between 2009 and 2020, there were seven.
A 10% pullback today would take the US stock market below 5,000 points, erasing most of the gains seen in 2024. On July 18th, the S&P 500 broke below a key trendline support, which has historically led to periods of volatility. In late 2023, the market corrected by 9%, and in April 2024, it corrected by 4% following similar breaks.
Despite recent volatility, the broader technical structure of the stock market remains strong. Key moving averages are pointing upwards, and prices are trading within a well-defined and aggressive upward price channel. Flipping bearish now would mean fighting a strong uptrend.
Concerns would arise if the S&P 500 breaks below this price channel, potentially signaling a move much lower. This scenario would merit close attention, as it could indicate a more significant shift in market dynamics.
The Role of the VIX
The Volatility Index (VIX) is a crucial tool for understanding market sentiment. Spikes in the VIX typically coincide with market declines. The VIX has generally trended lower over the past few years, but a break above its downtrend line could signal increased volatility and a potential shift in market outlook.
Investor Sentiment: Smart Money
Another critical indicator is the OEX Open Interest Ratio, which gauges smart money sentiment. When this ratio is elevated, it means smart money is betting against the market, often coinciding with market peaks and corrections.
Conversely, a low ratio indicates bullish sentiment among these investors. Today, the OEX Open Interest Ratio is historically low, suggesting that smart money is bullish on the market. While this is just one indicator, it has consistently provided reliable insights into market trends.
Conclusion
To summarize, we are not yet flipping outright bearish on the stock market. There could be more volatility, but the overall trend remains strong. We are holding onto many of the trades initiated in April, including small caps, biotech stocks, and Solana, which has surged 30% since our entry. However, we are monitoring the markets on a daily basis and will be ready to adjust our strategy based on the market conditions that unfold. Click here to sign up! Subscribe to our YouTube channel and Follow us on Twitter for more updates!
