Investor Sentiment: What's It Saying about the Market?

It is often said that the market is driven by fear and greed. These emotional influences tend to create the peaks and valleys that are all too typical in the stock market cycle. At the end of the day though, fundamental stock and economic factors will determine the long run performance of the market. However, in these stress periods, it is important to try and determine where the investor is emotionally in terms of market sentiment.

In a recent comment by Charles Kirk of The Kirk Report, he felt the market has entered the discouragement phase. As the below chart notes, the discouragement phase comes after the capitulation phase and begins the market bottoming process.

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Source:

• Invivo Analytics (The Invivo Analytics site contains a full discussion of The Investor Sentiment Cycle.)

As the below chart of the weekly performance of the S&P 500 Index notes, most of this year's loss has occurred in the last eight weeks.

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Could this eight week decline of nearly 35% be an indication the market has gone through the panic phase? If so, maybe the market goes through a bottoming process (discouragement phase) over the next several weeks. It would certainly be nice to see this play out and have the market start climbing that "wall of worry."

Comments

[sickofthehype:]

This chart is missing the infamous 'shit your pants' phase, which apparently has begun at DJIA <8K. The 'puke your guts out' phase will follow, so beware.

2008 Nov 20 11:10 AM

[patio:]

Sicko- classic!
All these dudes trying to use historical charts to try to make sense of this market, thsi world economy, this horrific mess.
It truly is different this time.

2008 Nov 20 04:40 PM

[Smarty_Pants:]

What's missing is the disclaimer that the first chart of investor sentiment is not drawn to scale. The elapsed time for 'discouragement' may be as much as a year or two more. There's plenty of time before we need to be overly concerned with that 'wall of worry'.

2008 Nov 20 08:54 PM