Can Investor Sentiment Predict Stock Market Falls?

It is often suggested that market euphoria - overwhelming confidence among investors - is a sign a crash is around the corner. Does the data stack up?

John Rekenthaler 21 July, 2017 | 8:26AM
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It has now been nearly a decade since anything resembling a global bear market, a situation that has comforted investors into believing that securities carry only "minor risks." Compliant government policies, such as ultralow interest rates, enhance the mirage.

Six months ago, I penned my own forewarning; my contrarian sensibilities were offended by investor sentiment – specifically, the so-called "Trump Bump." Prior to the election, stocks gained when Hillary Clinton's fortunes rose; investors, it appeared, favoured the status quo. After the election, stocks advanced again, because we were told investors favoured change. Heads stocks win, tails stocks win. That felt like euphoria to me.

So much for my intuition; stocks have since soared, with scarcely a look backward. Well, nobody takes my stock market musings too much to heart. Probably not Singer's opinions, either, even though he is paid to make asset-allocation decisions. Even the gullible realise that predicting the stock market's direction for the next few months is a task that exceeds the grasp of mortals.

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John Rekenthaler

John Rekenthaler  John Rekenthaler is vice president of research for Morningstar.