Negative Sentiment Suggests A Near-Term Bottom

It seems odd that market sentiment should fall so precipitously, considering the market is only down around 6% from its highs. But then again, QE 2 is winding down, which is making the bulls a little glittery. Below is a chart of one very good indicator I follow, which is flashing a contrarian buy signal. It is known as the Nasdaq Sentiment Index courtesy of Market Harmonics. Yes, sentiment surveys have been largely useless in response to the Fed's money printing POMOs, but this indicator has a relatively good track record of calling market bottoms. A reading below -150 usually indicates a bounce. We are currently at -194.

While this indicator looks good, I am going to wait for the latest AAII sentiment poll on Thursday for confirmation. I would like to see some real capitulation on the part of the retail crowd. That would give further evidence that the market is nearing a bottom--at least for the intermediate period.

click chart for larger image

Black Swan Insights


1 comment: