Editor’s Note: Today we’re bringing you an article from our dear friend Keith Kaplan, CEO of TradeSmith – an Oxford Club Pillar One Advisor.
The Oxford Club has worked with TradeSmith for more than a decade. And if you’ve attended any of the Club’s events, you’ve likely visited a TradeSmith booth or heard Keith speak.
But if you haven’t had the privilege of meeting Keith and learning about TradeSmith’s innovative investor resources, you’ll soon have a chance to…
Recently, Keith sat down with Chief Investment Strategist Alexander Green and Chief Income Strategist Marc Lichtenfeld to discuss The $50,000 Income Challenge.
During the event, Keith, Alex and Marc reveal how to add $50,000 or more to your income over the next 12 months – without buying any new stocks, bonds or options.
This is such a valuable presentation that we’ve arranged for Oxford Club Members to attend for FREE. (Absolutely free! No credit card required!)
– Rebecca Barshop, Senior Managing Editor
If the recent debt ceiling storyline proved anything, it’s that investors are an emotionally vulnerable bunch.
U.S. stocks were whipsawed as a flurry of bad news/good news developments out of Washington had investors feeling bearish one day and bullish the next.
In a year that began with carryover fears of war and inflation – and where we’ve added bank failures, job losses and recession fears – Washington’s debt ceiling mess feels like one more downer added to an already dour list of reasons to be fearful about stocks.
So-called “scare headlines” help supercharge this negative sentiment.
A couple of weeks ago, in fact, after a “survey” of its readers, one national financial publisher headlined a story with warnings of “peak” investor fears.
Here’s where you need to be careful.
Decisions based on emotion – and not data – can be downright ruinous when it comes to investing and trading.
Here at TradeSmith, we deal in data – data packaged in a way that helps you make the right decisions… and helps you make money.
Today we’re going to show you a very different “take” on market sentiment – a take based on data, not emotion.
A Tool to Get the Job Done
The TradeSmith tool I’m talking about is our Fear & Greed indicator.
It identifies how bullish or bearish investors are, to be sure. But it’s much more than just a “pulse” of market sentiment. In environments like the one we’ve just described, it can serve as a contrarian moneymaking tool.
Most folks buy when they’re feeling greedy (bullish) and sell when they’re feeling fearful (bearish).
Now, knowing how any single investor is feeling at a particular time isn’t all that useful. But if you roll all those folks up into one group – into what we know as “the market” – and you understand that sentiment… well, that can be incredibly useful.
But market sentiment doesn’t work the way you might assume.
For example, when most individuals are feeling extremely greedy about stocks, you might take that as a positive sign… as confirmation that a bullish stance is the right one.
However, in practice, this actually tends to be a negative or bearish sign for the market.
Because it suggests that most investors are already betting that stocks will move higher. And if most folks have already bought, it means there are likely not many people left to buy more and push prices even higher.
In other words, extremely greedy sentiment is a warning sign that a rally could be losing steam and a downside reversal is possible.
It works the same way in the other direction too.
When most individuals are feeling extremely fearful about stocks, it tends to be a bullish sign.
It suggests that most investors are expecting more losses. And if most folks have already sold, there likely aren’t many left to sell even more and push prices lower.
So extremely fearful sentiment is a sign that a decline could be ending and a new rally is possible.
As you can see, taking advantage of market sentiment isn’t complicated. But there are a few finer points you should understand.
Extreme sentiment measures can always become even more extreme before a trend finally reverses. And the timing is always uncertain.
Also, while sentiment can be useful on its own, it works even better when used alongside other tools or indicators.
For example, sentiment can be incredibly powerful when combined with our tools. It can also work well with commonly available indicators like the relative strength index and even simple moving averages.
Finally, there are many different types of sentiment tools available for investors, each with its own strengths and weaknesses.
So for most folks, I think it makes great sense to use a “composite” tool that combines several different measures into a single, easy-to-read score.
As mentioned earlier, here at TradeSmith, we have our own proprietary tools and features to create the most powerful sentiment indicator out there.
(To learn more about accessing this tool, watch my presentation with Marc and Alex HERE.)
As of this writing, we’re seeing the Fear & Greed indicator right in the middle of the “Greed” sentiment.
Surprised? Given the tenor of the news and the prevailing scare headlines, you probably are.
But our tools are data-based, and they can give you a more realistic view of what’s happening than you’ll ever get by skimming top news stories.
So what does this “Greed” sentiment tell us to do?
First, remember that you want to exercise extreme care at market extremes, since market extremes are where stocks are potentially overbought or oversold.
Being in “Greed” mode can indicate people are more bullish on stocks, which makes sense ahead of the Federal Reserve potentially pausing rate hikes in June.