Chart of the Week - Sentiment Shifts
Chart in-focus from the latest Weekly S&P500 ChartStorm
Note: this is a new series for free subscribers and is intended to give an insight into the work that goes into The Weekly ChartStorm + provide a little further explanation on charts and concepts.
This week’s chart presents an unusual sentiment indicator which serves a specific purpose to a specific type of market participant.
This composite indicator takes into account sentiment readings from surveys + market metrics: the VIX (volatility/fear gauge) and the forward PE ratio (being ultimately a measure of investor confidence).
The inputs are also smoothed so that it provides the most useful signal to longer-term active investors who are less fixated on the day-to-day news/noise.
We’ve seen a significant reset in this indicator already.
This says we are close to a major market bottom.
However we still need to respect risk. The direction of travel (bearish momentum) from previously euphoric levels of sentiment does suggest caution, and the highest conviction bottoming signals historically came only once it reached or breached the zero-line (like it did in recent years during 2016, 2018, 2020, and 2022).
So it’s a key chart to have on the radar because even with today’s news (Trump comments on unilaterally finishing the War) and the enthusiastic rebound in stocks, it’s entirely possible that we still see another leg down before this episode is all done and over with given the various moving parts and lingering issues.
Bottom line: longer-term measures of investor sentiment have seen a major reset already (albeit are yet to approach levels seen around major market bottoms).
p.s. yes —I will update this chart in future editions of The Weekly ChartStorm, so stay tuned!
Conceptual Notes
Zooming out from the day-to-day developments, it’s useful to keep in mind the market cycle conceptual model.
The reason we want to respect risk in this type of juncture is that the stockmarket is stumbling and rolling over from expensive levels — this is the zone of maximum risk.
It’s entirely possible that we end up getting enough of a reset (in sentiment, valuations, positioning, and maybe even policy too) to engineer a short/sharp correction and resumption of the bull market… but given the background setup described and what we understand about market cycles, it would pay to be pragmatic about things (balancing the desire for maximum gains from participating in rebounds vs diversification and defense against the potential for further downside).
Thanks for reading!
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Best wishes,
Callum Thomas
Founder & Editor of The Weekly ChartStorm
and Head of Research at Topdown Charts
Twitter/X: https://twitter.com/Callum_Thomas
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