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Nothing Like a Price Trend to Change Investor Sentiment  Thumbnail

Nothing Like a Price Trend to Change Investor Sentiment

The U.S. stock market has got off to a strong start for 2023, so far. 

Investor sentiment is trend following . 

Below is a chart template I call "Trend Following + Nothing".  It's a simple line chart of the price trend with its 20, 50, and 200 day moving average. 

A few observations of the S&P 500 trend over the past year;

After printing a series of lower highs and lower lows, the SPX has recently trended above the prior high, and is now trending up by all of these measures. 

The SPX is now above the 20/50/200 trifecta by 3-5%. 

The 50 day moving average is very close to printing a Golden Cross; when the 50 day average  (blue line) crosses above the (red line) 200 day average.

It matters because some CTA trend following systems that run billions of capital get buy signals from this Golden Cross and the SPX index trending above these simple moving averages trigger CTA trend followers to shift from short to long. 

Nothing changes investor sentiment like a change in price, call it momentum or a volatility expansion. 

The Fear & Greed Index is a composite of seven different indications of sentiment, and after last week's price gains it is now registering "Extreme Greed" as the market driver. 

I shared on Twitter: Fear & Greed Index reached a new high.

Extreme levels of investor sentiment are a contrarian indicator.

Once everyone is already bullish, where does new enthusiasm to buy come from? 

Below are the S&P 500 and sector returns year-to-date, which the beaten down Communications Services sector with the formerly popular FAANG stocks like META, Google, and Apple has gained the most after being down the most in 2022.

Then comes the Consumer Discretionary sector with stocks like Amazon and Tesla. 

These are sharp rebounds off a very dismal bear market in 2022, so it's not a big surprise to see a bounce. 

The sharp uptrend breakouts make investors more optimistic about the stock market, but though strong momentum is bullish, it may be an overreaction in the short run. 

I have a hunch we'll see a lower risk entry opportunity in the near future. 

Mike Shell is the founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.