How Quickly Market Sentiment Has Changed

Includes: DIA, QQQ, SPY
by: Thomas Tan, CFA

It is very interesting to see that market sentiment has changed so quickly from January and March to the current state. Only a month ago, no one knew where the market bottom was, or whether the whole banking sector would fail along with Bear Stearns. Now it seems people have changed their minds 180 degrees with a collection of commonly heard positive sentiments (not limited to) those listed below:

From fundamental side:

1. The economy will recover during the 2nd half, so the bottom is in. The fundamental of the economy is sound and the equity market is a leading indicator.

2. With Fed's help, the banking sector has avoided a global financial meltdown, the write-downs are almost done and are approaching the final innings.

3. The Fed has put in the bottom and won't let the market break below it.

4. The decoupling of emerging markets from the US economy will provide support and growing revenue for multinational corporations in the US.

5.The market is a discount mechanism and all the bad news has already been reflected in the prices.

From technical side:

1. The market has re-tested the bottom and held it up well. It is a typical double bottom pattern. (note: even this pattern is true, the potential upward target is only around $1,500, not exceeding the previous top).

2. Recently, market has ignored all the bad news, and is bullish.

3. The VIX (volatility index) has broken the support line, indicating future lower implied volatility, and thus a bull market.

When things have changed from pouring rain days to blue sky days so quickly, it is very relieving, but at the same time, it can be deceiving, too. Only time can tell. However, I wouldn't bet on it.