Public Investor Sentiment is Extremely Negative

Public market sentiment is extremely negative.  Fear is currently running higher than it did during the Euro Debt Crisis of 2011.  The difference then was that fear didn't reach similar levels in 2011 until all of the problems with the euro zone became apparent and the S&P 500 had corrected approximately 15-20%.  Fear is higher today with less downside movement in equities.  What's interesting is how negative public sentiment is when compared to investor sentiment.  Investor Intelligence reports somewhat bearish or neutral sentiment while public sentiment has become extremely negative, extremely fast.  This is generally good for the stock market.

(charts courtesy CNN Fear & Greed, Stockcharts.com)

Fear Seems Overdone

There seems to be an awful lot of fear present in this relatively neutral market lull.  I'm not sure what to make of it.  A "difficult" period of market congestion may lay ahead.  Fear index is from CNN, VIX chart from stockcharts.com.

VIX

The volatility index (VIX) remained above 20 for most of the period between 1998 and 2003 during which time the technology boom completely unwound. The VIX spiked above 20 in late 2007 when the financial crisis began and has remained elevated since, dropping below 20 only briefly. It currently stands at 27. If history is to repeat itself, we may have a while to go before the VIX falls and remains below 20 for an extended period of time. This may be many months away but would indicate that confidence has returned to the equity markets for the long term and that a new bull market has truly begun. We are likely to experience sideways or range bound trading in the meantime.

Mid-Term Election Year

This year is a much talked about mid-term election year. As we all know, North American equity markets usually post a major multiyear low during the later part of a mid-term election year.




Have we seen the lows for the year or will the market move down sharply through September as it does in a typical mid-term election year? It really could go either way at this point. From a technical perspective, this year has played out in classic fashion. Support has held well on the DOW at ~10 000, dipping slightly below 9700 in July. If this year follows the mid-term election pattern, we could see the DOW make a low at ~9000, at which there is strong technical support. So was the July low, the multiyear low for the markets or are we going to fall into correction again and make new lows through September?

The problem with this mid-term election year is that it is the primary focus of the media more so than any other mid-term election year. Every stock analyst is referring to this year as a mid-term election year and drawing attention to the fact that a correction could be around the corner. Pessimism is elevated, the VIX is elevated but wavering, the Put/Call ratio is elevated, 10-year treasury yeilds are at record lows, bonds are overbought and there is still a ton of cash sitting on the sidelines.

The real question is whether or not there are enough sellers left to push the market to a new low.