As you can see in last Friday’s close of the Fear and Greed index below, sentiment is at an extreme with fear dominating investor’s emotions.
And why shouldn’t it when we see/hear headlines that help stir the pot.
“Wall Street tumbles on trade war fears; tech, financials weigh.”
“Dow drops more than 400 points into correction, posts worst week since January 2016”.
“NASDAQ 100 Plunges 7.3% in a week, most since August 2015”.
The good news is we are getting very oversold on the daily time frame and I expect we see a tradeable bounce soon (as early as this week), likely marking the end of this decline. This correction will likely end below February’s low and mark the end of the “C” leg, of the ABC pattern where I expect to see an oversold, divergent low formed. Strong declines, like powerful thrusts higher are typically ended at sentiment extreme readings like we have now. Being at 7 does not mean it can’t go lower in the near term, but a reading under 10 has me very interested in looking to deploy capital on a reversal trigger. One of the best gauges on how to invest/trade profitably is to do just the opposite (at extremes only) of what the crowd is doing.
The not so good news is the market character has changed with this decline. As such a “v” shaped return to prior highs that dominated much of 2015-2017 pullback action is probably out of the question. The change in character is not necessarily bearish, but definitely is no longer aggressively bullish. It’s a time to take the foot off the accelerator, invest with caution, optimize your portfolio (hold strength and sell weakness) and wait for the market to show its hand. Like the 2015 consolidation, I expect this to be a lengthy grind sideways where few things are trending and the only investors making money are the liars and RTM (reversion to mean) traders.
Consolidations follow trending periods and as such, we are due. I hope I am wrong on the expected length of this consolidation because there is no way to make money while in a sideways, sloppy, chop. They have a habit of testing investor’s convictions. As they say “if they don’t scare you out, they will wear you out.”