Market Sentiment Becoming Extreme

 |  Includes: DIA, QQQ, SPY, XLF
by: Market Beating Stocks

This was truly an historic and tumultuous week on Wall Street. The S&P 500 crashed, losing 18.2% over the past five trading days! The NASDAQ did only a little better losing 15.3% for the week. The level of panic and fear was clearly evident, with policy makers stepping up their efforts to provide stability and reassurance to investors. The behavior of the stock market and governmental actions taken over this recent period will likely write new material for the history books. But it is the overriding fear and exteme pessimism among investor sentiment that we now find encouraging.

The biggest news from last week was again centered on the financial sector and the economy. The bailout plan that was approved may have stemmed some bleeding, but it failed to jolt the market back on a positive course. Last week marked big downturns in global markets, as fear spread across the globe. In a remarkable event, Global central banks coordinated an emergency rate cut on Wednesday, but this dramatic action failed to move the market in a material way. In addition, the Fed announced plans to buy short term commercial paper in an effort to unfreeze credit markets, but this too failed to turned the market.

Rumors are now surfacing that policy makers may target direct capital investments into financial companies to provide them much needed capital and liquidity. The government has taken and continues to consider historic actions in their efforts to provide liquidity, unfreeze credit markets, and to improve confidence in the financial system. Despite these efforts, the fear and pessimism in the marketplace is getting extreme.

Obviously, this year's stock market performance has been dramatic and painful for most investors and volatility remains at historically high levels. Recent news has been saturated with gloom and doom, with frequent comparisons to the great depression. Even the famous and widely followed Jim Cramer urged his audience to sell all stocks despite the ongoing selling frenzy. The negative hype in the marketplace and the call for world collapse is starting to get extreme. A turning point in the market usually happens when we hit extreme levels on either end of the sentiment spectrum. That said, we are not quite ready to say that the stock market has hit bottom, but do believe that bottom may be close in light of the current sentiment and the fact that equities in general are now trading at very compelling price levels.

Overall, we think that the economy has a long way to go before it gets better, but do believe the market may be getting oversold. Of course, until buyers and money flows return, stocks will likely stay flat at best over the short term. Investors that are willing to take the risk and that can be patient over a longer holding period will likely be rewarded.

Disclosure: none