How Investor Sentiment Might Impact the Current Market Scenario

Investor sentiment is an often overlooked, but potentially consequential metric. In this video, Daniel Seder, CFA, CMT, CFP®, Managing Partner of Blue Chip Partners, discusses how investor sentiment might impact the current market scenario.

Transcript

Dan Seder: Hi, my name is Dan Seder, Managing Partner at Blue Chip Partners, and today I’m going to talk about investor sentiment. Sentiment is particularly important when it’s at extremes, and I’m going to show you how this metric can be used to manage your expectations moving forward.

All right, today I’m going to talk about investor sentiment. And on the screen here, I have the CNN Fear and Greed index, and this gauge measures investor sentiment going from extremely greedy to extremely fearful on a scale of zero to 100. Current readings right now are at 82, which fall in the extreme greed category. And so, sentiment is really important to evaluate at extremes. When we’re at a level of extreme greed, in the words of Warren Buffett, it may be a time to be fearful, and vice versa. When we’re at a time of extreme fear, it could be a time to be greedy. Let’s take a look at where we’ve been here previously. Last close was at 80, a week ago at 78, a month ago at 79, and a year ago at 35, which is really interesting.

So, when we go back and look at the timeline of where this index has measured, we’re currently at the top end of a trading range, so at the top end of where these measures typically fall. And interestingly, when we look at some of these lower troughs, they occur near bottoms in the market. This chart tends to look a lot like the movement of the market. When it peaks, the market generally peaks, and when it troughs, the market generally tends to trough. And that tells us, or that’s confirmation, that sentiment is worse at lows and sentiment is best at highs. And so, when sentiment is extraordinarily high, or measures or readings are very high, that’s a great contrarian indicator. And now I’m not calling for a pullback in the markets. I just think it’s something that investors should consider when evaluating their portfolios and managing expectations.