Thursday , 13 June 2024

We Are In A New – More Dangerous – Phase of the Market Cycle

…We are in a new phase of the market cycle, and this is usually the morebulls bears dangerous stage – the part that offers both rapid and sizable returns, but the part that becomes increasingly vulnerable to shocks…

The original article by Callum Thomas has been edited here for length (…) and clarity ([ ]) by to provide a fast & easy read.

The key takeaways from this unique view on sentiment are:

  • Bullishness is the dominant mood of the market right now.
  • There has been a major capitulation from neutral sentiment to bullish sentiment and this particular trend may have room to run further.
  • On a shorter time frame, both bullish and bearish sentiment are near all-time record extremes (high and low respectively).
  • Such extremes in sentiment suggest the risk of a correction is rising.

1. Smoothed View:

The chart below shows the rolling 12-month average of the combined AAII + Investors Intelligence surveys, normalized (i.e. historical z-score). Basically,

  • bullishness has resurged to levels last seen:
    1. during the height of the dot-com boom; 
    2. at the start of the mid-2000’s bull market;
    3. and just prior to the 2015 correction.

I’ll let you decide what kind of bullish climax this is, but I think example a. & c. are probably closest.

2. Shorter Term View:

Taking the monthly average view (specifically, the 4-week average of the 2 surveys) provides an even starker view (given the shorter term moving average places a greater weight on more recent data points). Bullish sentiment is close to the record high seen at the end of 2003, while bearish sentiment is at the third lowest point.  This is extreme.

3. Neutral Sentiment:

The rise of neutral sentiment was a big theme for me back before the 2015/16 corrections. It was at the time a symptom of investors being basically bullish by force of momentum (“the trend is your friend”), yet skeptical enough to not label themselves as bulls but, since then, there has been a wave of capitulation as these former neutrals have shifted over to the bullish side – interesting thing is it could probably still go further. 


Over the past 2 years, and particularly in the last 12 months, there has been a major shift underway in sentiment…The Euphoriameter has moved into extreme Euphoria territory…Narrowing in on all 3 major components of the sentiment surveys, you can see clearly how bears have given up, and neutrals have capitulated. 

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