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Peter Osterlund
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Peter Osterlund runs a private equity fund in Boston, Massachusetts. He studied mathematics and economics at The University of Chicago and has written about politics and the economy for such publications as The Economist, The Wall Street Journal, and Rolling Stone.
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  • Rocket Fuel For The Stock Market's Next Rally 0 comments
    May 16, 2012 12:49 PM

    (click to enlarge)

    Sometimes, a picture is all you need. Or, in this case, a chart of the NYSE Composite Index plotted against the VIX "Fear Index" Futures ETF UVXY. Set at five bars per daily session, by the way.

    As a rule, when the Fear Index goes up, the stock market goes down, and when the Fear Index goes down, the stock market's headed up. Here, I've used some basic math to directly compare the momentum of the NYSE Composite to the momentum of the VIX Fear Index. The idea is that extremes in fear--or euphoria--rarely last, and when these extremes fade, the pendulum of the stock market starts to swing the other way.

    Often times, sentiment extremes tend to pulse before evaporating. In this chart, notice the second pulse of extreme bullish sentiment, identified by the red circle, and the market's peak last month.

    Notice, too, the second pulse of extreme bearish sentiment, identified by the green
    circle...right where we are now.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SPY, QQQ over the next 72 hours.

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